Despite predictions of a house price slump when the coronavirus pandemic hit in 2020, the UK housing market has been booming, fuelled by pent-up demand and a temporary cut to stamp duty. Property prices jumped 13% in the year to June 2021 – the highest level since November 2004 – according to Nationwide data. The stamp duty holiday ended on 30 June, but the government launched another scheme, which we cover in this guide.
Once you’ve cobbled together a 5% deposit, your next step is to convince a lender that you have a regular income before it will offer you a mortgage. And the lower your deposit, the more important this becomes. It makes getting a mortgage particularly tough if you’re on a temporary or zero-hours contract. This guide is here to help.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
What do lenders think about zero-hour contracts?
Workers on these contracts may be viewed less favourably by lenders, especially when compared to someone on a permanent contract with a guaranteed income. This is because a zero-hours contract worker is generally considered higher risk and more likely to miss mortgage payments in the future.
Current employment
It’s not all doom and gloom, though. Some lenders will take into account how long you’ve been in your current contract, with most requiring a minimum of 12 months working in the current position for most sectors.
Time served
Lenders will also look at how long you’ve worked in your industry and could be more willing to consider your application if you’ve served 3 years, compared to someone who has just started.
Your profession
It’s also the case that those in certain professional positions such as doctors, nurses and barristers may be approved with a shorter history than others.
Whatever your situation, it’s all about finding the best lender for you and your unique circumstances.
There’s a range of specialist and regular lenders that can provide loans to those who work on a contract basis. You can also seek help from a fee-free mortgage broker.
How do lenders assess your income for a contract mortgage?
If you’ve been a contract worker for most of your employment history, lenders will often take an average of what you’ve earned in the last few years. That average is then used to calculate how much you can afford to borrow and repay. If, for example, you earned £30,000 in a year, £32,000 the next and £29,000 in a third year, the lender will calculate your average income to be around £30,000.
However, this may not work if your income fluctuates dramatically – for example, if you earn £30,000 in a year and £21,000 the next.
In these cases, lenders may use the most recent year, or the lowest, as an indication of your earning capacity. This will likely result in you being allowed to borrow less than you might have expected to get.
Example: John applies for a contract mortgage
John has been a contract worker in the same industry for 3 years and decides to apply for a mortgage. Because John's income has fluctuated over the past 3 years, his chosen lender takes an average to work out his mortgage affordability. This comes to £35,000 and allows John to borrow up to £165,000 over 25 years. At an interest rate of 4.23%, his monthly repayments work out to be £892.02.
To ensure his monthly repayments are more affordable in the event his income reduces, John decides to buy a smaller house and only borrow £140,000. This brings his monthly repayments down to £756.87.
* This is a fictional, but realistic, example.
How much of a deposit is required?
A minimum deposit of 5% will usually be required for those on a zero-hours contract, but this will depend on factors such as the lender you choose and your credit history. If you have a poor credit score, perhaps because you have struggled to keep up with repayments on previous debts, you may be required to put down a deposit of at least 15%. You may be able to take advantage of the government’s mortgage guarantee scheme, launched in April 2021. It aims to encourage lenders to offer more 95% mortgages, after many were ditched when the pandemic struck. Under the scheme, the government promises to compensate lenders for a portion of any losses incurred if a borrower defaults on their mortgage payments and the lender has to repossess the property. Anyone with a deposit of 5% to 9% can apply.
Which lenders are good for zero-hours contract mortgages?
A wide range of lenders will consider zero-hours contract mortgage applications, all with a different lending policy. If you have been declined by some of the bigger high street lenders, such as NatWest and Nationwide, it’s worth considering specialist lenders that may have a more flexible policy. It can also be a good idea to speak with a fee-free mortgage broker who can help you establish which lenders are more likely to offer you a mortgage based on your financial circumstances.
Zero-hours contract mortgages: Halifax, Lloyds, Nationwide and more
We researched the mortgage policies of some of the UK’s major mortgage lenders to find out whether they accepted zero-hours contracts. Here’s what we found out (correct at 20 July 2021).
Provider
How it views zero-hours contract applicants
Compare
Coventry Building Society
Zero-hours contract applications are only accepted from NHS bank nurses and locums, non-NHS bank nurses, care home workers, supermarket workers (including delivery drivers), retained/on-call firefighters and Armed Forces Reservists.
Applications from customers employed on a zero-hours contract for over 12 months will be considered. Proof of income in the last 12 months is required and that total income figure will be used.
Applicants will be considered providing they have been employed in the same role for a minimum of 12 months. Zero-hour contract income is now only accepted from NHS Bank nurses and locums, non-NHS bank nurses, care home workers, supermarket workers (including delivery drivers), retained/on-call firefighters and Armed Forces Reservists.
Applicants are considered on an individual basis and the customer must have a minimum of 12 months’ contract history, evidencing no gaps exceeding 6 weeks.
If you’re on a fixed-term contract, lenders may be more willing to offer you a mortgage compared to someone on a short, temporary contract. This is particularly the case if you can prove to the lender that you have an extended period of regular income and gaps between contracts are short. Some lenders may ask that gaps are no more than 6 to 12 weeks.
Lenders will usually want to see that you have at least a 12-month history of contracting and you have at least 6 months remaining on the current contract. If you are a higher income contractor, this may also work in your favour. Additionally, lenders may consider factors such as:
The length of time with your current employer
Whether your contract has previously been renewed
The prospects of getting other employment in the same type of work at a similar salary
What can I do to improve my chances of getting a mortgage?
There are a number of steps you can take to increase your likelihood of getting approved for a mortgage.
Save a larger deposit. The larger your deposit, the less you have to borrow and the less of a risk you represent to the bank when lending to you. Lenders will view your application more favourably and may offer you a lower interest rate and a more affordable monthly payment.
Proof of long-term security. Providing lenders with evidence of future employment agreements can help to prove you are able to afford a mortgage.
Fewer breaks between jobs. One of the advantages of contract employment is the ability to take time off between jobs and manage your own schedule. If you’re planning to buy a home, it might help to minimise the length and number of gaps between jobs in the lead-up to buying a home. Lenders may be wary of borrowers with lengthy stints of time off between jobs.
Improve your credit score. Strengthening your credit score is always a good idea. Pay off any outstanding debts, whether it’s a personal loan or credit card debt. As a contractor, showing that you can manage your finances responsibly is more important.
How to compare mortgages for contract workers
Even though your income criteria may be different than that of other borrowers, you can generally still apply for many of the same loan products as someone with a more steady form of employment. Consider these options when choosing your mortgage:
Documentation required. Evidence of income for the past 2 years (in some cases this may be 12 months). Details of your contract, including start and end dates, and the terms for payment.
Interest rate. The special circumstances of your mortgage application may encourage banks to offer you the mortgage at a higher interest rate than other borrowers. Check to see the rates they display online compared to what is being offered to you at a branch, and don’t be afraid to ask for a discount.
Fees. Look carefully at the fees for mortgages and try to find one that charges fees which justify the features and interest rates.
Interest type. You should consider whether the flexibility of a variable rate or the certainty of a fixed rate is better suited to your circumstances.
Note that if you are a freelancer, requirements will be slightly different. You can read more about mortgages for freelancers in our guide.
Pros and cons of a mortgage for a temporary contract worker
Pros
Availability. Mortgages are available for all types of casual workers, including those with fluctuating hours, zero-hour contracts, casual nurses and teachers. As long as you can show evidence of your income, it is still possible to get a mortgage.
Options. You will be able to choose from a number of different lenders that specialise in mortgages for contract workers.
Flexibility. Having access to a typical mortgage will help you set up your terms and repayments to work best with your fluctuating income.
Cons
Higher fees and rates. Some lenders may charge you extra fees or higher interest rates for the higher risk they perceive you to have.
You may need an accountant. Lenders could request the contact details of an accountant to verify your income. If you don’t have an accountant, you may want to consider one just to sort out your documentation.
Tips to strengthen your mortgage application
If you’re ready to apply for your mortgage, take a look at these tips:
Consider what you can afford. Don’t make an application for an amount that will leave you struggling to make ends meet each month.
Check your credit score. This can be affected by a huge range of factors, such as bill payments and any debt that you have.
Apply for a mortgage in principle. This is an agreement from a lender to give you mortgage finance in theory.
Are you eligible for schemes? If you’re a first-time buyer, there are a number of schemes to give you a helping hand.
Update your details. If there are any discrepancies in your mortgage application, it could be delayed or even rejected.
Get evidence of your deposit. Prove where your deposit has come from, whether it was a gift or from your own savings.
Budget correctly. Don’t forget to factor in fees for your mortgage application, as well as solicitor and house survey fees.
Stamp duty. Find out what you’re required to pay, which depends on your first-time buyer status, property price and location.
Prepare for the exchange deposit. When your offer is accepted, you’ll be asked to pay this fee (10% of the property price).
Consider a mortgage broker. They can help you find the right deal and help you submit the best possible application.
Tips to save for a deposit
Make saving for that dream house or flat manageable with our advice below.
Consider your options. Can your parents help? Could you buy with friends to share costs?
Can you reduce the deposit you will need? Check out the variety of schemes on offer, such as Help to Buy.
Have a savings plan. Work out how much you can realistically save each month and make a plan to reach this goal within a timeframe.
Decide where to stash your savings. Open a separate savings account, which should be one that offers the best interest.
Compare savings accounts. Propel your savings plan with the right savings account. Compare and contrast the different savings accounts on offer here.
Watch your savings grow. Review it at least once a year to check you’re getting the best rate of interest possible.
Bottom line
Being a contract worker can make it harder to get accepted for a mortgage, but it’s not impossible. Taking steps such as improving your credit score and saving up a big deposit can help increase your chances of getting accepted. Being able to show evidence of your income for the past 2 years, details of upcoming contracts and evidence that any gaps between work have been minimal will also stand you in good stead.
Frequently asked questions
The length of time you have been with the same employer will determine this. Most lenders require 2 years worth of employment documentation, though some may require 3.
This will be entirely dependent on your income and the value of the property you are trying to buy.
A range of high street and specialist lenders offer mortgages to contract workers. All lenders will evaluate applications from casual workers on a case-by-case basis, so a mortgage broker can be a good option, as they will know from past experience which lenders are more suited to contract workers.
There are a range of lenders and products available for contract workers, and while nothing is certain, a prospective lender will look at your income, employment history and credit file when deciding whether or not you’d be eligible for a mortgage. In addition, a mortgage broker will also have knowledge about which lenders to approach to maximise your chances of approval.
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To make sure you get accurate and helpful information, this guide has been edited by Moira Daniels as part of our fact-checking process.
Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
If you’re a single parent buying a home, you may be able to use child benefit payments to supplement your income when applying for a mortgage.
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