Remortgage for Contractors

How Do Lenders Assess Contractor Income?

The way lenders assess contractor income varies significantly, and this is where the biggest opportunity lies for contractors seeking a remortgage. There are broadly two approaches that lenders take.

Contract rate method. Some lenders will assess your income based on your day rate or contract value, annualising it to calculate your yearly income. For example, if you earn 400 pounds per day and work five days a week, your annualised income would be calculated as 400 times 5 times 48 weeks (allowing for holidays), giving an assessed income of 96,000 pounds. This approach often results in a much higher assessed income than looking at your accounts.

Accounts-based method. Other lenders assess contractor income in the same way as any self-employed borrower, looking at your SA302s, certified accounts and the income you have actually drawn from your company. If you operate a tax-efficient structure with low salary and dividends, this approach can significantly understate your true earning capacity.

The contract rate method is clearly more advantageous for most contractors, as it reflects your actual earning potential rather than your tax planning decisions. However, lenders who use this method typically require:

• A current contract or evidence of recent continuous contracting
• At least 12 months of contracting experience in your field
• A minimum day rate, often around 250 to 500 pounds per day depending on the lender
• Evidence of contract renewals or a track record of securing new contracts

Working with a broker who specialises in contractor mortgages is essential to ensure you are matched with a lender using the most favourable assessment method for your situation.

Types of Contractor Arrangements and How They Affect Remortgaging

The way you structure your contracting work can have a significant impact on your remortgage options. Understanding the implications of each arrangement helps you prepare the right documentation and target the right lenders.

Limited company contractors. If you operate through your own limited company, you have the most flexibility in terms of lender choice. Lenders who use the contract rate method will look at your day rate, while those using the accounts method will examine your company accounts and personal tax returns. The key advantage is that contract-rate lenders can assess your true earning capacity regardless of how much you draw as salary and dividends.

Umbrella company contractors. Working through an umbrella company simplifies the mortgage process in many ways because you receive regular payslips like a permanent employee. Many lenders will treat you as employed, making the process much more straightforward. However, your assessed income will be your net pay after the umbrella company deductions, which may be lower than your contract rate suggests.

Fixed-term contract employees. If you are employed on a fixed-term contract rather than being self-employed, many lenders will assess you as an employee provided your contract has a certain amount of time remaining, typically at least three to six months. Some will also want to see evidence of contract renewals or a history of continuous employment.

Agency contractors. If you work through a recruitment agency on temporary assignments, lenders may assess your income based on your payslips or your track record of continuous work. Having evidence of regular, consistent assignments strengthens your application considerably.

IR35 and Its Impact on Contractor Remortgages

IR35 legislation has had a significant impact on how many contractors work and how their income is structured. Understanding the implications for your remortgage application is important.

If your contracts are assessed as inside IR35, you will typically be paid through PAYE, either via an umbrella company or the client's payroll. In this situation, you receive payslips and your income is assessed in a similar way to a permanent employee, which can simplify the mortgage process.

If your contracts are outside IR35, you continue to operate through your own limited company and have more control over how you draw your income. Lenders who use the contract rate method will assess your income based on your day rate, which usually results in a higher assessed income than your drawn salary and dividends would suggest.

The changes to off-payroll working rules that placed the responsibility for IR35 determination on end clients have led to some contractors changing their working arrangements. If you have recently moved from outside to inside IR35, or vice versa, it is important to discuss this with your broker as it may affect which lenders are most suitable.

Some lenders have specific policies for contractors affected by IR35, and a specialist broker will be up to date with the latest criteria across the market. The key is to be transparent about your working arrangements and let your broker find the most appropriate lender.

Documentation for a Contractor Remortgage

The documents you need will depend on your contracting arrangement and the lender's assessment method. Here is a comprehensive guide to what you may need.

For contract rate assessment:

• Your current contract showing your day rate, client name and contract duration
• Evidence of your contracting history, such as previous contracts or a CV
• Bank statements showing contract payments received
• Company accounts if operating through a limited company
• Proof of identity and address

For accounts-based assessment:

• Two to three years of SA302 tax calculations and tax year overviews
• Certified accounts prepared by a qualified accountant
• Personal and business bank statements
• Current contract details
• Proof of identity and address

For umbrella company contractors:

• Three months of payslips from your umbrella company
• Your current contract or assignment details
• Bank statements showing salary payments
• P60 or P45 from the current or previous tax year
• Proof of identity and address

Regardless of which assessment method is used, having your documentation organised and readily available will speed up the process and demonstrate professionalism to the lender.

Gaps Between Contracts and How They Affect Your Application

One concern many contractors have is how gaps between contracts might affect their remortgage application. The good news is that most lenders who specialise in contractor mortgages understand that gaps are a normal part of contracting life.

Lenders who use the contract rate method typically build in an allowance for gaps by annualising your day rate over a reduced number of weeks, often 46 or 48 weeks rather than 52. This acknowledges that you may have periods between contracts or take holiday time.

However, extended gaps can raise concerns. If you have had a gap of more than a few weeks between contracts, be prepared to explain the reason. Common acceptable explanations include planned holidays, training or professional development, or a short break between long-term contracts.

If you are currently between contracts at the time of application, some lenders will require you to have a signed contract or confirmed start date before they will proceed. Others may be satisfied with evidence of your contracting history and confirmation that you are actively seeking new work.

To minimise concerns about gaps, maintain a clear record of your contracting history showing continuous or near-continuous work. A CV or spreadsheet listing your contracts, clients, dates and day rates can be a useful document to provide alongside your formal application paperwork.

Best Strategies for Contractor Remortgages

To get the best possible deal on your contractor remortgage, consider the following strategies.

Apply when you have a current contract. Lenders are most comfortable when you have an active contract with time remaining. If possible, time your remortgage application to coincide with the early stages of a contract rather than the tail end.

Build a strong contracting CV. A track record of continuous contracting with reputable clients in your industry demonstrates stability and reliability. Keep records of all your contracts, including client names, dates and day rates.

Maintain clean personal finances. Keep your personal and business finances clearly separated. Ensure your personal bank statements show regular, consistent income from your company or umbrella and avoid large, unexplained transactions.

Consider the timing relative to your accounts. If you are assessed on an accounts basis, ensure your latest accounts are available before applying if they show stronger figures. For contract-rate assessment, the timing relative to your accounts matters less.

Work with a contractor mortgage specialist. This cannot be overstated. A broker who specialises in contractor mortgages will know which lenders offer the best deals for your specific arrangement and can navigate the complexities of contractor income assessment with expertise.

Keep your LTV as low as possible. Like all borrowers, contractors benefit from lower LTV ratios. The best rates are typically available at 60% LTV or below, with further rate improvements at 75% and 80%.

Contractor Remortgage With Gaps in Employment History

If you have transitioned between permanent employment and contracting, or have had periods of unemployment in your history, you may have additional concerns about how this affects your remortgage application.

Most lenders are primarily interested in your current and recent situation rather than your distant employment history. If you have been contracting successfully for the last two or more years, what you were doing before that is generally less relevant.

However, if you became a contractor relatively recently, perhaps within the last year or two, lenders may want to understand your full employment history to assess the stability of your career. In these cases, being transparent and providing a clear timeline of your employment and contracting history is important.

Some lenders have specific criteria around how long you need to have been contracting before they will use the contract rate method. The minimum is typically 12 months, though some may require 24 months. If you do not yet meet these thresholds, an accounts-based assessment may be the more viable route.

If your employment history includes periods of redundancy or unemployment, this will not necessarily count against you as long as you can demonstrate a stable contracting career now. Focus on presenting your current financial position and contracting track record as strongly as possible.