Contractor Mortgage Daily Rate
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Contractor Mortgage Daily Rate
Adam Messer talks to us about mortgages for contractors who are on a daily rate.
What do we mean by a daily rate contractor?Can a contractor on a daily rate get a mortgage?
Yes, absolutely. In fact, contractors probably have the biggest choice of mortgages, because you could either use your self-employed income or be assessed as a contractor.
You might be a sole trader or you might have a limited company, which is often more common in contracting. You could use your self-employed income, your limited company salary, dividends or profit, and some lenders will actually use your daily rate.
They’ll take that rate and multiply that by five days a week, and then again by 46 or so weeks of the year. I know there are 52 weeks in a year, but they assume you have some holidays and maybe take a break between contracts.
So if you earn £500 a day, that turns into over £100,000 of contracting income a year – £115,000 to be exact. That’s quite a big income. You might not take that much out of your company. Perhaps you don’t need to take out more than the higher rate tax threshold, so you take out £50,000.
Some lenders will just look at the £50,000 as your income, while others will take the £115,000. If £50,000 is enough for what you want to borrow, we could go to any lender. But to borrow a bit more, there will be a more limited choice. But we’ve got that choice to make. We’ve got lots of different options when you’re a contractor.
What are the different types of daily rate contractors?
You could be a contractor that is self-employed. If you’re earning under £50,000 you might just be a sole trader. Remember, I’m not an accountant so this isn’t tax advice or accounting advice.
But there comes a point with your income where it’s worth being a limited company. It’s more common for me to see people with limited companies for their contracting. So your ‘employer’ will pay you a certain amount, that goes into your company and then you take money out of your company.
It depends how you’re fixed with what IR35 – if you’re a contractor you’ll know what I’m talking about. There might be an umbrella company involved, as a middleman between you and the employer. There’s another podcast to enjoy at your leisure on that one.
What proof does a daily rate contractor need to provide when applying for a mortgage?
There are a few things we’ll need over and above the normal documents. If you’re employed, we just get pay slips and bank statements and that’s it.
If you’re a contractor, we’re going to want to see your current contract and perhaps the previous or next one, depending how long you’ve been doing it and how long is left. If it’s about to finish, we’ll want the next one. If it’s only just started, we’ll want the previous one.
We’re going to want bank statements, as well, to show the money going from your client into your limited company. If you’re part of an umbrella company, they’ll give you a pay slip or pay statement as well. We’ll probably want to see that and then the money hitting your account.
What if I have only recently become a contractor? Does this affect the mortgage process?
It’s not so easy, to be honest. It depends on the length of the contract. Let’s say you’re an IT contractor and you’ve got a 12 month contract. Perhaps you were employed before in IT, and we could show via your pay slips that you earned a similar amount as you do contracting.
If you’ve only been doing it for a couple of months, but you’ve got a 12 month contract and a work history in this area, that could be okay. There are one or two lenders we could go to with that.
If you’ve only just started and it’s just a six month contract, that’s going to be quite tricky. We probably want to wait until you’ve done this first one or you’re nearing the end of it and you’ve got the next contract lined up. It becomes a little bit easier then.
12 months is the key. You don’t have to have been doing it for 12 months as long as your contract is that long. It’s different if you’ve only just started a six month contract.
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How do lenders calculate a daily rate contractor’s annual income?
They’ll look at your daily rate and calculate a year’s earnings based on that.
I used the example of £500 per day before. We usually assume you’re working a five day week. That will normally be in your contract. If you’re only doing a three or four day working week we would multiply that by three or four.
Assuming it’s a five day week, £500 times five is £2,500 and then they’re going to multiply that up for the year. Obviously there are 52 weeks in a year, but you’re going to go on holiday, and you might want a couple of weeks off in between contracts.
So lenders don’t times it by 52 – it’s typically 46. So if we take £2,500 by 46, we get to £115,000. The odd lender might do 48 weeks of the year. That’s pushing it a little bit, but that gives you an income of £120,000.
That’s the calculation most lenders make if they’re going to use your day rate rather than view you as self-employed or as a limited company owner.
How much track record do I need?
If you’re going to a lender as a limited company director, we need two years’ income figures.
But for a contractor, you could have started six months ago as long as there’s another six or 12 months on your contract. You don’t need the same long history if you’re using your contractor income.
How do I remortgage as a contractor on a daily rate?
There are no differences – the same rules apply to a purchase and a remortgage.
What if I have bad credit?
It depends how bad. It’s not necessarily the end of the world. There are some lenders we could go to, but it very much depends on the details.
The right thing to do is get a copy of your credit report so we could see what’s on there before we talk to lenders. Missed or late payments a couple of years ago will have very little impact.
With a default or CCJ it depends how old it is.
But there are lenders that will do contractor mortgages with bad credit, depending how bad it is.
What if I have a small deposit?
If you have 5%, with one or two lenders that will still be okay. Their contractor criteria is the same no matter what you’re borrowing or how much deposit you’ve got.
If they look at your day rate contract and you pass their credit scoring, they’ll lend to you. If they do 95% mortgages, being a contractor wouldn’t stop you getting one.
Are there any differences for a contractor that’s a First Time Buyer?
No – it makes no difference.
Can I get a Buy to Let mortgage as a daily rate contractor?
Yes, no problem at all. Again, it depends how we look at your income. Lenders focus less on your income for a Buy to Let and and more on the rental income for the property you’re buying or mortgaging. But income is still a factor.
Most lenders on a Buy to Let will require a minimum income of around £25,000. We might get that from your limited company ownership, your day rate or even your partner.
It’s certainly much easier to get a Buy to Let mortgage as a contractor because it’s not so much about your income. There are even some lenders we could go to that don’t have a minimum income requirement.
What if my partner is on PAYE, how does that work?
You could get a joint mortgage based on a combination of both criteria. The lender will look at you as a contractor and assess your income in that way, then they’ll look at your partner and their income based on their PAYE criteria.
That’s generally more straightforward because it’s just a salary – but if there is overtime, bonus or commission that will be factored in. How much would depend on the lender, but it’s fine.
You don’t both have to be doing the same thing. We’ll use your income as it is and your partner’s income in the appropriate way for the lender.
Do I need a specialist mortgage broker to help me?
You just need a mortgage broker that’s used to doing contracts. Probably most mortgage brokers know about it, because it’s quite common.
Some mortgage brokers advertise themselves as experts in a certain field but it doesn’t mean they can’t do other things. That’s just the kind of business that they go after and are used to doing.
We help people with all sorts of situations, but we do work with a lot of self-employed people and contractors. Most mortgage brokers should be able to help you. We certainly could, so get in touch.
The information contained within was correct at the time of publication but is subject to
change. 16.07.2024
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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