Several lenders will assess a contractor on their day rate rather than their accounts — typically multiplying the daily rate by five, then by 46 or 48 weeks, to produce an annualised income figure. For many contractors that figure is considerably higher than what their accounts suggest, and it can transform what they are able to borrow.
Why this matters so much
A contractor operating through a limited company often draws a modest salary and takes the rest as dividends, leaving profit in the business for tax reasons.
Assessed conventionally, a lender sees the salary and dividends drawn — which may be a fraction of what the contract actually generates. Assessed on day rate, the lender sees the contract value.
The difference between those two figures is frequently the difference between a disappointing mortgage offer and the one you expected.
How the calculation works
The standard approach:
day rate × 5 days × 46 to 48 weeks = annualised income
Lenders differ on the number of weeks — 46 is common and conservative, 48 more generous. Some use 52 for contractors with an unbroken record.
That annualised figure is then treated much like an employed salary, with normal income multiples applied.
Hourly-rate contractors are usually handled the same way, converted to a daily equivalent first.
Who qualifies
Criteria vary, but the recurring requirements:
A current contract, showing the rate and the term. This is the core document.
A track record. Commonly twelve months' continuous contracting, though some lenders accept six, and a few will consider contractors moving straight from employment into contracting in the same field.
Minimum rate thresholds. Some lenders set a floor on the day rate.
Reasonable gaps between contracts. Short gaps are normal and expected. Long or frequent ones weaken the case.
Renewal history helps considerably. A contractor who has been renewed repeatedly by the same client presents better than one on a first short contract.
Which contractors this covers
Across Leicestershire, day-rate assessment regularly applies to:
- IT and technology contractors — the largest single group
- Engineering contractors, including those working with the county's manufacturers
- Construction professionals — project managers, quantity surveyors, site managers
- Interim management and consultancy
- Some healthcare locums, though these are often handled under separate locum criteria
Whether it applies to trades on day rates varies more between lenders, and depends on how the work is contracted.
Inside or outside IR35
Lenders increasingly ask about IR35 status, and it affects how they assess you.
Outside IR35, operating through your own limited company, is the classic contractor case and the one day-rate assessment was designed for.
Inside IR35, or working through an umbrella company, means you are effectively taxed as an employee. Some lenders then treat you as employed and assess on the payslips from the umbrella company — which can be simpler, though the gross figure will be lower after the umbrella's deductions.
Neither is a problem. They just point to different lenders.
What to have ready
- Your current contract, signed, showing rate and end date
- Previous contracts covering your track record
- CV or a summary of your contracting history
- Three months of personal and business bank statements
- Proof of deposit
- Company accounts, if you have them, though they may not be the basis of assessment
Timing your application
Two practical points that matter more for contractors than for most applicants.
Apply with time left on your contract. Lenders like to see a reasonable remaining term — a contract with a few weeks left invites questions about what happens next. If a renewal is imminent, it may be worth waiting for it.
Do not apply during a gap. A gap between contracts is normal in the work but awkward in an application. Apply while working.
Deposit and the usual sticking point
Day-rate assessment affects how your income is read. It does not change the deposit requirements — 5% is possible with the right lender, 10% or more improves the rate, exactly as for an employed applicant.
The sticking point is more often where the deposit sits. Contractors frequently hold funds inside the limited company rather than personally, and lenders want to see the deposit in your own account, with an explanation of its source.
Money moved out of the company shortly before an application will be questioned, and taking a large dividend purely to fund a deposit has tax consequences worth checking with your accountant first.
Plan this a few months ahead. Move the funds, let them settle, and have the explanation ready.
The mistake worth avoiding
Contractors frequently apply to their own bank, are assessed on drawn salary and dividends, receive a disappointing figure, and conclude that contracting has made a mortgage difficult.
It has not. It has made the choice of lender important. Approaching a lender that does not do day-rate assessment, and accepting its answer, is the single most common way contractors under-borrow.
Call 0116 277 7536 or see self employed mortgages in Leicester.
More guides: self employed guides for Leicester.
