TL;DR: Most contractors can remortgage for a better deal by using specialist lenders that assess income based on day rates rather than just salary and dividends. While competitive rates are available, your property may be at risk if repayments are not made on time.

Can contractors remortgage for a better deal?

For many professionals in the UK, the flexibility and financial rewards of contracting are highly appealing. However, when it comes to the mortgage market, contractors have historically faced challenges that traditional employees do not. If you are currently on a mortgage and your initial deal is coming to an end, you might be asking: can contractors remortgage for a better deal?

The short answer is yes. The UK mortgage market has evolved significantly over the last decade. Many lenders now have a much more sophisticated understanding of how contractors work, meaning that being self-employed or working via an umbrella company is no longer the barrier it once was. Whether you want to reduce your monthly outgoings, borrow more for home improvements, or simply gain the security of a new fixed rate, remortgaging is a viable path for most contractors.

Why should contractors consider remortgaging?

Remortgaging is the process of moving your current mortgage to a new deal, either with your existing lender (a product transfer) or with a new provider. There are several reasons why a contractor might seek a new arrangement:

• Ending a fixed-rate term: Most people remortgage when their current deal ends to avoid moving onto the lender’s Standard Variable Rate (SVR), which is typically much higher.
• Securing a lower interest rate: If your financial situation has improved or market rates have dropped, you may find a deal that reduces your monthly interest costs.
• Changing your borrowing amount: You might want to release equity from your property to fund renovations, consolidate debts, or invest in another project.
• Flexibility: As a contractor, you may want a mortgage that allows for significant overpayments without heavy penalties, helping you pay off your loan faster during high-earning periods.

While the benefits are clear, it is essential to consider the costs involved. Some lenders charge arrangement fees for new deals, and if you leave your current mortgage early, you may face Early Repayment Charges (ERCs). It is important to calculate whether the long-term savings of a better deal outweigh these initial costs.

How lenders assess contractor income

One of the main reasons contractors worry about remortgaging is how their income is assessed. Traditionally, lenders looked at the last two or three years of audited accounts, focusing on the salary and dividends drawn. For tax-efficient contractors who keep most of their money in their business, this often resulted in a lower borrowing capacity.

Today, many contractor-friendly lenders use a “day rate” calculation. This method is often more beneficial as it looks at your gross contract value rather than what you actually pay yourself. A typical calculation might look like this:

(Day Rate x Days worked per week) x 46 or 48 weeks = Annualised Gross Income.

Lenders then apply their standard affordability multiples to this figure. This approach generally allows contractors to borrow significantly more than if they were judged solely on their personal tax returns. However, eligibility and the specific multipliers used vary between providers and are subject to your overall financial profile.

The importance of your credit score

Regardless of your income, your credit history plays a vital role in determining whether you can remortgage for a better deal. Lenders want to see a track record of responsible borrowing and timely payments. Before you begin the remortgaging process, it is wise to check your credit file to ensure there are no errors that could negatively impact your application. A healthy credit history is vital for securing the best rates.

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What do you need to prepare?

Preparation is key when you are a contractor looking to switch mortgage deals. Lenders will typically want to see evidence of a stable contracting career. While requirements differ, you should generally have the following ready:

• Current and previous contracts: Lenders usually look for a history of contracting (typically 12 to 24 months) and evidence that your current contract has at least 4 to 6 weeks remaining.
• Bank statements: Both personal and business statements for the last three to six months to prove your income and outgoings.
• Identification: Standard Proof of ID and proof of address documents.
• Accounts or SA302s: Even if the lender uses day-rate calculations, they may still ask for your latest tax returns or company accounts to verify your financial standing.

If you have had gaps between contracts, this isn’t necessarily a deal-breaker. Most lenders understand that contractors take breaks or face short periods of “benching” between projects. Usually, as long as the gaps are not excessive (for example, more than 6-8 weeks in a single year), many lenders will still consider your application.

Understanding the risks of remortgaging

While remortgaging can lead to better financial outcomes, it is not without risk. You must ensure that any new deal is affordable for the long term, especially given that contracting income can fluctuate. It is vital to maintain a buffer for periods when you might not be working.

Your property may be at risk if repayments are not made. If you fail to keep up with your mortgage payments, your lender could take legal action against you. This may eventually lead to the repossession of your home. Furthermore, defaulting on payments will damage your credit score, making it much harder to borrow in the future. You may also face increased interest rates and additional penalty charges from your lender if you fall into arrears.

For impartial guidance on the process and to understand the different types of mortgages available, you can visit the MoneyHelper guide on remortgaging provided by the UK government.

Specialist lenders vs. High Street banks

When asking if contractors can remortgage for a better deal, it is important to look beyond just the big-name high street banks. While some major banks have become more contractor-friendly, others still rely on rigid automated systems that may struggle to process complex income structures.

Specialist lenders often provide more manual underwriting. This means a human being reviews your application, looking at the “big picture” of your career, your industry experience, and your future earning potential. These lenders can often offer competitive rates that match or even beat those found on the high street for individuals with non-standard income.

The impact of IR35

The off-payroll working rules (IR35) have changed how many contractors operate in the UK. If you are “inside IR35” and working through an umbrella company, your income is treated similarly to a standard employee for tax purposes. Many lenders now have specific policies for umbrella company contractors, often using your gross contract rate (before the umbrella company’s margins and employer costs are deducted) to calculate affordability. Being inside or outside IR35 does not stop you from remortgaging, but it does change which lenders will be most suitable for your needs.

People also asked

How long do I need to be contracting before I can remortgage?

Most lenders prefer you to have at least 12 to 24 months of contracting history in the same line of work. However, some specialist lenders may consider you with only six months of history if you have a significant background in the same industry as a permanent employee.

Can I remortgage if I have only just started a new contract?

Yes, as long as you have a track record in your industry. Lenders generally want to see that your current contract has some time left on it, or that you have a history of renewing contracts successfully.

Are interest rates higher for contractor mortgages?

Generally, no. If you meet the lender’s criteria, you should have access to the same competitive interest rates as any other borrower. The key is finding the lender whose criteria best fit your specific income structure.

Can I get an interest-only remortgage as a contractor?

Interest-only options are available, but they usually come with stricter criteria, such as a higher minimum equity requirement and a clear repayment strategy. Lenders will still need to be satisfied with your contractor income to prove affordability for the interest payments.

Do I need a specialist broker to remortgage as a contractor?

While not mandatory, a broker who understands the contractor market can be invaluable. They know which lenders use day-rate calculations and which ones are more sympathetic to gaps between contracts, potentially saving you time and money.

Summary: Finding the right path

Contractors can remortgage for a better deal, provided they approach the market with the right preparation. By understanding how your income is assessed and ensuring your documentation is in order, you can access a wide range of products designed to suit your professional lifestyle. Always weigh the costs of switching against the potential savings, and ensure that your new mortgage remains affordable even during periods between contracts.

Remember that a mortgage is a long-term financial commitment. Taking the time to research the market or seeking professional advice can help you secure a deal that provides both value and peace of mind for your future.