Day-one Contractor Mortgage

If you’ve just left a permanent PAYE job to take your first contract, how do lenders view your employment history?

When you are taking your first contract and want to take out a mortgage, your employment history is quite important. Lenders like to see what industry and what type of role you have been doing.

It can be very difficult if, for example, you were employed as a hairdresser for two years and then suddenly became a contracting sports coach. Because of this, lenders prefer to see your employment history in a similar industry, particularly in a very similar or even the same role.

Does it help if your first contract is in the same industry you were permanently employed in?

The short answer is yes, absolutely. It is really important to have some experience, particularly if you are entering your first contract.

If you are in your early years of contracting and want to take a mortgage out, the lender is going to feel more comfortable if you have already done a role within the same industry.

What’s the minimum contract length lenders typically want to see for someone on their first-ever contract?

For someone on their first contract, lenders like to see three, six, or maybe even 12 months. The longer the term is, the more likely lenders are to lend. The shorter it is, the more they want to see another contract on top of that.

For example, if it is three or six months, they will probably want to see a renewal contract or a history of renewals. If it is your first contract and it is only three months, it is going to be a bit of a challenge. If we have 12 months, two years, or even longer, lenders are going to feel much more comfortable based on those longer time periods.

How does IR35 status affect your mortgage options as a brand new contractor?

That is a tough question to answer, and it is probably one for HM Revenue & Customs (HMRC). However, lenders do not look too deeply into IR35. They likely want it to fall outside IR35 if you are going to proceed on contracting.

Is it harder to get a mortgage as a day-one contractor compared to someone who’s been contracting for a year or two – and by how much?

The short answer is yes. If you have been contracting for a day or a few weeks, it is ultimately more difficult than for someone who has been contracting for a few years.

However, the key difference is that if you have only been contracting for a short while but you have a few years of experience, you could be treated very much the same as someone who has been contracting for a few years. It just might mean that there are fewer mortgage options available.

That is where we come in. We can help you understand which mortgage lenders are suited to your length of contract and your time of contracting.

What are the most common reasons day-one contractor mortgage applications get declined?

One of the most common reasons for declining a mortgage application, particularly if you are on a contract, is the length of the contract and no sign of a renewal. If you are on a short-term contract, it could be month-to-month rolling, three months, or six months.

The challenge is when there have been no historic renewals, or there are no plans to renew your contract. This can cause an issue for the lender because you have no work or commitment from the employer moving forward.

Are there particular professions or industries where lenders are more willing to accept day-one contractors?

There are quite a few professions where lenders are more flexible with day-one contractors. The popular ones would be IT contractors – so if you are a software engineer or working in a similar role. The same goes for medical professionals, such as doctors, and roles in construction. Because these are popular roles that are in high demand, lenders generally are a little more flexible for those professions.

What should someone do to prepare before they leave permanent employment and start their first contract, to give themselves the best chance of getting a mortgage?

Speaking with a mortgage adviser at the earliest opportunity is the most effective preparation step you can take. You should do this even before you enter the contract.

You need to understand the length of the contract you are being offered. Lenders may need to know if you require a renewal or a little bit longer. It is also important to look at how much you are being paid, including whether you are charging a daily rate. There are lots of things that go into play.

An early conversation helps you understand what documents you will need to prove your income. You will need these when applying for a mortgage and finding your first home.

Summary

Getting a mortgage on the very first day of your first contract is entirely possible, especially if you have previous experience working in the same industry. While lenders are becoming more flexible, options can still vary widely between different banks.

If you are making the jump from a permanent job to contracting, our advisers are here to help. We can guide you through the process, help you understand what lenders are looking for, and find the right mortgage options for your new career.

Key Points

• You can get a mortgage on day one of your first contract if you have prior experience in a similar industry or role.
• Lenders prefer longer contracts such as 12 months, or shorter contracts that come with a clear history of renewals.
• Professions like IT, construction, and medicine often see more flexibility from lenders because they are in high demand.
• Short contracts with no sign of a renewal or future work commitment are a common reason applications get declined.
• Speaking to one of our advisers before you leave your permanent job gives you a chance to prepare your documents and find the right lender.