TL;DR: Generally, contractors do not pay higher interest rates than permanent employees, provided they meet the lender’s criteria. However, you may face higher costs if you have to use a specialist lender due to complex income structures or gaps between contracts. Your property may be at risk if repayments are not made.

Do contractors pay extra when remortgaging?

For many professionals in the UK, the flexibility of contracting offers a higher earning potential and a better work-life balance. However, when it comes to the world of property finance, contractors often worry that their employment status will make them appear “risky” to banks. A common question that arises is: do contractors pay extra when remortgaging?

The short answer is typically no. In most cases, contractors have access to the same interest rates and mortgage products as permanent employees. However, the path to securing those rates can be more complex. Depending on how you evidence your income and which lender you choose, there are specific scenarios where you might find yourself paying more in fees or being restricted to certain products.

The Reality of Contractor Mortgage Rates

Mortgage lenders do not usually have a separate “rate card” for contractors. If you apply for a remortgage with a mainstream bank and you meet their criteria, you will likely be offered the same fixed or variable rates as a salaried person. Lenders care most about your ability to repay the loan and the level of risk you represent. If you have a steady history of contracting and a good credit score, you are generally not seen as a higher risk.

The perception that contractors pay “extra” often comes from the fact that some contractors struggle to meet the strict criteria of high-street lenders. If a mainstream bank rejects an application because of a recent gap between contracts or a complex limited company setup, the borrower may have to look at specialist lenders. These niche lenders may charge slightly higher interest rates or higher arrangement fees to account for the manual underwriting required to assess the application.

How Lenders Calculate Your Income

One reason contractors might feel they are paying more is that they are not always offered the maximum loan amount they expect. This is usually due to how different lenders calculate income. Understanding these methods can help you avoid unnecessary costs.

• Day Rate Multiplication: Some specialist lenders will take your current day rate, multiply it by five days, and then by 46 or 48 weeks to calculate your annual income. This often results in a higher borrowing capacity.
• Net Profit and Salary: High-street lenders may look at the salary and dividends you draw from your limited company. Because many contractors keep money in their business for tax efficiency, this “drawn” income might look lower than their actual earnings, leading to a smaller mortgage offer.
• Average Earnings: If you are a sole trader, lenders typically look at an average of your last two or three years of self-assessment tax returns.

If you cannot prove sufficient income through one method, you might be forced to use a lender that accepts a more flexible calculation but charges a higher “specialist” rate. This is where the “extra” cost can manifest.

Additional Costs to Consider

While the interest rate itself might not be higher, there are other costs associated with remortgaging that contractors should keep in mind:

Broker Fees: Many contractors use a mortgage broker to navigate the complexities of the market. While some brokers are fee-free, others charge a fee for their expertise in finding contractor-friendly lenders. This is an additional upfront cost, though it can save you thousands in the long run by securing a better rate.

Arrangement Fees: These are standard across the industry, but some specialist products have higher percentage-based fees rather than flat fees. Always check the total cost of the deal, including the fee, rather than just looking at the interest rate.

Valuation and Legal Fees: These are standard for any remortgage. However, some “contractor-specific” deals may include free valuations or legal work as an incentive.

The Importance of Credit Scores

Your credit history plays a significant role in determining whether you pay extra. If a contractor has a perfect credit score, they can often access the most competitive rates on the market. If your credit file has “blips,” you may be relegated to sub-prime lenders who charge significantly higher interest rates. Before starting your remortgage journey, it is wise to check your standing.

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The Impact of IR35 on Remortgaging

The introduction of off-payroll working rules (IR35) has changed the landscape for many UK contractors. If you are “inside IR35,” you are essentially treated as an employee for tax purposes, often paid through an umbrella company. Many lenders have updated their policies to accommodate this, treating your “gross pay” from the umbrella company as your salary.

If you are “outside IR35,” you retain more flexibility in how you pay yourself, but you must be prepared to provide more robust documentation, such as company accounts and contracts. Misunderstanding these rules can lead to delays or rejections, which might ultimately result in you missing out on lower interest rate windows.

Managing Risks When Remortgaging

When remortgaging as a contractor, it is vital to remember that a mortgage is a long-term financial commitment. While the flexibility of contracting is a benefit, it can also lead to periods of lower income. You should ensure that the monthly repayments remain affordable even if you are between contracts for a short period.

Your property may be at risk if repayments are not made. If you default on your mortgage, the lender may take legal action, which could lead to repossession. This may also result in increased interest rates and additional charges. Always seek professional advice if you are worried about your ability to meet repayments.

For more detailed information on how self-employment and contracting impact your mortgage options, you can visit the MoneyHelper guide on self-employed mortgages, which offers impartial guidance for UK residents.

Tips to Avoid Paying Extra

• Keep a continuous contract history: Try to avoid gaps of more than 6-8 weeks between contracts in the 12 months leading up to your remortgage.
• Have your paperwork ready: Ensure you have at least your latest contract (showing your day rate) and your last three months of bank statements ready to go.
• Use a specialist broker: A broker who understands the contractor market can identify lenders that use day-rate calculations, ensuring you don’t have to settle for higher-rate specialist products.
• Maintain a healthy deposit or equity: The more equity you have in your home (Lower Loan-to-Value), the lower your interest rate will typically be, regardless of your job title.

People also asked

Can I remortgage with only six months of contracting history?

Yes, some lenders will consider contractors with only six months of history, especially if you have a history of working in the same industry as a permanent employee before you started contracting.

Is it harder for IT contractors to remortgage?

Actually, IT contractors are often looked upon favourably by lenders because the industry is well-established for contracting, and many lenders have specific policies designed for “professional” contractors.

Do umbrella company contractors pay more?

No, most lenders now view umbrella company income as regular salary, meaning you can access standard market rates as long as you can provide payslips and a valid contract.

What happens if my contract is about to expire?

Most lenders require at least 4 to 6 weeks remaining on your current contract, or evidence that your contract has been renewed or a new one has been signed.

Do I need two years of accounts to remortgage?

While many mainstream lenders prefer two years of accounts, many specialist contractor lenders only require your current contract and evidence of your day rate to approve a remortgage.

Conclusion

In summary, contractors do not inherently pay extra when remortgaging. The UK mortgage market has evolved significantly, and many lenders now recognise that contracting is a stable and lucrative career choice. The “extra” costs only tend to appear if your specific circumstances—such as a poor credit score, very short contract history, or significant gaps in employment—force you toward specialist lenders with higher fees.

By preparing your documentation in advance, maintaining a solid credit history, and working with a broker who understands how to package a contractor’s application, you can secure competitive rates that are no different from those offered to your salaried peers. Always remember to consider the full cost of the mortgage, including any arrangement or legal fees, to ensure you are getting the best possible deal for your situation.