Mortgages and borrowing amounts for contractors

Beckie Pepperrell explains how lenders assess how much a contractor can borrow when applying for a mortgage.

When determining how much a contractor can borrow, lenders generally use one of three affordability calculations.

1. Annual net profit x lender’s income multiple
    This calculation is often applied to contractors who operate as sole-traders.

2. Salary + net profit or dividend x lender’s income multiple
    This calculation is often applied to contractors who trade via limited companies.

3. Day rate x 5 days x 46 weeks per year x lender’s income multiple
    In this instance it doesn’t matter whether the contractor is a sole-trader or uses a limited company.

Most lenders use either the first or second calculation depending on how the contractor runs their business. However, if maximising the amount that can be borrowed is key, then contractors should ask their broker to source a lender which applies a day rate calculation when assessing affordability. Here’s an example to demonstrate why:

Mr Pepperrell owns a limited company which makes £50,000 of profit, all of which is withdrawn as dividend. He pays himself a notional salary of £10,000 and charges a day rate of £500.

Assume a lender’s multiple of 4.5 x salary.

 Salary + dividends + net profit
x lender's income multiple 
Annual salary  £10,000              
Dividends / net profit per year + £50,000
Total income per year £60,000
Lender's income multiple x 4.5
Maximum borrowing £270,000 


Day rate x 5 days x 46 weeks
x lender's income multiple
Day rate £500             
Days per working week x 5
Total income per week £2,500
Weeks per year x 46
Total income per year £115,000
Lender's income multiple x 4.5
Maximum borrowing £517,500


Using the day rate calculation Mr Pepperrell would be able to borrow a whopping £247,500 more than the standard affordability calculation. (Lenders which use the day rate calculation do not mind if the contractor is a sole-trader or trades through a limited company).

How long do I need to have been contracting for?

Generally speaking lenders need a contracting history of two years, ideally with six months plus left on the current contract. However, there are always exceptions depending on the individual details of the case, so don’t write yourself off if you don’t meet this criteria straightaway.

What sort of contracting work is acceptable to lenders?

Lenders will consider most types of contracting work. We regularly help contractors working in IT, security, construction, business consulting, the oil and gas industries and sport. If what you do is unusual don’t assume that you won’t get a mortgage; lenders are more interested in your experience than the field in which you operate.

I work on a zero-hours contract, can I get a mortgage?

Yes, like any other contractor, lenders like a history of two years contracting with six months left to run on your existing contract. Again, if you don’t quite fit this scenario, there are lenders who will consider borrowers on a case by case basis and if we think you have a good strong chance of success, we’ll negotiate on your behalf.

What evidence of earnings will I need to provide?

This differs from lender to lender but can include some or of the following:

Past and existing contract agreements
Tax returns / SA302s
Bank statements

How do I know which lenders to approach?

That’s where we come in! We are independent mortgage brokers with access to the whole market including lenders that only offer mortgages via intermediaries. We’ve been helping contractors for years and have a deep understanding of the lending criteria of both mainstream and specialist providers, so do get in touch to talk through your requirements. You can call me directly on 01732 417602 or use our main number 0345 345 6788 to speak to any broker on the residential desk.

Most advice and applications can be done over the phone and via email; however, if you prefer to talk to us face to face, do visit our offices. We have headquarters in Kings Hill, Kent just outside London and a regional office in Wilmslow, near Manchester.

Our advice is free of charge and without obligation and we only charge a broker fee if we are successful in getting you a formal mortgage offer. We will, of course, provide you with full details up front of the costs and fees involved so don’t be afraid to discuss this with us!


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