TL;DR: Yes, contractors can generally access 95% mortgages through government-backed initiatives like the Mortgage Guarantee Scheme, provided they meet specific lender criteria regarding their work history and income. However, borrowing a high percentage of a property’s value carries risks, and your property may be at risk if repayments are not made.

Can contractors get a 95% mortgage under government schemes?

For many contractors in the UK, the prospect of homeownership can feel daunting. Traditional lending criteria often favour those in permanent, “nine-to-five” employment, leaving those who work on a contract basis wondering where they stand. However, the mortgage market has evolved significantly. Today, it is entirely possible for contractors to secure a mortgage with just a 5% deposit, often by using government-backed schemes designed to encourage low-deposit lending.

While the path to a 95% mortgage may require a bit more preparation for a contractor than for a salaried employee, the opportunities are there. This guide explains how these schemes work, what lenders look for, and the steps you can take to move into your new home with a smaller deposit.

Understanding the 95% Mortgage Landscape

A 95% mortgage, also known as a 95% Loan-to-Value (LTV) mortgage, means you provide a 5% deposit while the lender provides the remaining 95% of the property’s purchase price. For many, this is the most accessible way to enter the property market, as saving for a 10% or 20% deposit can take many years, especially as property prices rise.

Historically, lenders were cautious about offering high LTV mortgages to contractors because they perceived contract work as less stable than permanent employment. Fortunately, the introduction of the Mortgage Guarantee Scheme by the UK government has encouraged many lenders to return to the 95% market. This scheme provides lenders with a guarantee for a portion of the loan, reducing their financial risk and making them more willing to lend to those with smaller deposits.

The Mortgage Guarantee Scheme and Contractors

The Mortgage Guarantee Scheme was launched to increase the availability of 95% LTV mortgage products. It is available to both first-time buyers and current homeowners looking to move, provided the property is their primary residence and costs £600,000 or less.

For a contractor, this scheme is a vital tool. Most major UK lenders participate in the scheme, and many of these lenders have specific policies for assessing contractor income. As long as you can prove a consistent track record of contract work and a sustainable income, you can typically apply for these products just like any other borrower. It is important to remember that while the government guarantees a part of the loan to the lender, you remain fully responsible for the mortgage repayments.

Failure to meet these obligations has serious consequences. Your property may be at risk if repayments are not made. Defaulting on a mortgage can lead to legal action, repossession of your home, increased interest rates, and additional charges that can further complicate your financial situation.

How Lenders Calculate Contractor Income

The main challenge contractors face is not necessarily the 5% deposit, but how a lender calculates their maximum borrowing limit. Different lenders use different methods, and choosing the right one can significantly impact the amount you can borrow.

• The Day Rate Method: This is often the most beneficial for contractors. Many specialist lenders will take your current daily rate, multiply it by five days, and then multiply that by 46 or 48 weeks to calculate an annualised gross income. This often results in a higher borrowing capacity than looking at taxable profit or salary and dividends.
• Average of Accounts: Some lenders prefer to treat contractors like standard self-employed applicants. They may look at your last two or three years of accounts and take an average of your net profit or your salary and dividends. For contractors who keep profits in their limited company for tax efficiency, this method might limit the amount they can borrow.
• CIS Contractors: If you work under the Construction Industry Scheme (CIS), some lenders will use your gross pay as evidenced by your CIS vouchers or bank statements, rather than your post-tax profit.

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Eligibility Criteria for Contractors

While government schemes make 95% mortgages more available, lenders still have strict criteria to ensure the loan is affordable. As a contractor, you will generally need to demonstrate the following:

• Experience: Most lenders prefer you to have been contracting in the same industry for at least 12 to 24 months. Some may accept a shorter duration if you have a long history of permanent employment in the same field.
• Contract Continuity: Lenders look for “continuity of service.” If you have had significant gaps between contracts (usually more than six to eight weeks), they may ask for an explanation.
• Remaining Contract Term: Lenders often like to see that you have at least four to six weeks remaining on your current contract, or a renewal already lined up.
• Sector Stability: Certain sectors, such as IT, management consultancy, and healthcare, are often viewed more favourably due to the high demand for skilled contractors.

For more detailed information on how self-employed income is viewed, you can visit the MoneyHelper guide on mortgages for the self-employed, which provides unbiased advice on navigating the process.

The Pros and Cons of a 95% Mortgage

Applying for a 95% mortgage under a government scheme has both benefits and drawbacks that you should weigh carefully.

The Benefits

• Lower Upfront Cost: You can get onto the property ladder much sooner by only needing a 5% deposit.
• Availability: The government guarantee means more lenders are willing to offer these products, increasing your choices.
• Equity Building: Instead of paying rent, your monthly payments contribute to building equity in your own asset.

The Risks

• Higher Interest Rates: Generally, the less deposit you have, the higher the interest rate will be. 95% mortgages are typically more expensive than 75% or 80% LTV loans.
• Negative Equity: If property prices fall, a small deposit gives you very little “buffer.” You could find yourself owing more than the property is worth, which makes remortgaging or selling very difficult.
• Strict Stress Testing: Because the loan is high compared to the property value, lenders will “stress test” your finances rigorously to ensure you can still afford payments if interest rates rise.

Tips for a Successful Application

To improve your chances of securing a 95% mortgage as a contractor, preparation is key. Ensure your paperwork is in order before you approach a lender or broker. You will typically need:

• Your current contract and potentially previous contracts from the last 12 months.
• Three to six months of personal and business bank statements.
• A valid form of ID and proof of address.
• Your latest P60 or tax year overviews if you are not using the day-rate method.

Working with a specialist mortgage broker can also be highly beneficial. Brokers who understand the “contractor market” know which lenders are most sympathetic to your income structure and which ones are currently offering the best rates under the government’s 95% guarantee scheme.

People also asked

How do lenders calculate a contractor’s income?

Most specialist lenders calculate income by taking your daily contract rate, multiplying it by five days a week, and then by 46 or 48 weeks to reach an annual gross figure. Other lenders may average your last two years of accounts or tax returns.

Can I get a 95% mortgage if I have only been contracting for six months?

While many lenders require two years of history, some will consider you if you have at least six months of contracting experience and a two-year history in the same profession. It often depends on the strength of your current contract and your previous employment background.

Do government schemes apply to newly built houses?

The Mortgage Guarantee Scheme can be used for new-build properties, but some lenders have their own internal limits on LTV ratios for new builds, sometimes capping them at 85% or 90% due to the “new-build premium” risk.

Are 95% mortgages more expensive for contractors?

The interest rates for 95% mortgages are generally the same for contractors as they are for salaried employees, but they are higher than mortgages with larger deposits because the lender is taking on more risk.

What happens if my contract ends during the mortgage application?

Lenders usually require a current, active contract to proceed. If your contract ends and you do not have a new one signed, the lender may pause the application until you can provide evidence of your new contract and income.

Conclusion

Contractors are no longer excluded from the benefits of low-deposit homeownership. Thanks to government schemes like the Mortgage Guarantee Scheme and a growing number of contractor-friendly lenders, getting a 95% mortgage is a realistic goal. By understanding how your income is assessed and ensuring your financial documentation is robust, you can navigate the application process with confidence.

Always remember to consider the long-term affordability of the loan. While a 5% deposit makes entry easier, the associated monthly costs and interest rates are higher. Protecting your home should be your priority, so ensure you have a financial buffer in place. Your property may be at risk if repayments are not made, and failure to keep up with your mortgage could lead to repossession and additional financial penalties.