Contractor mortgages: how the day-rate method works

Two ways a lender can read a contractor

A contractor applying for a mortgage can be assessed in two fundamentally different ways. The first is the day-rate method, where a lender annualises the contract value using a formula based on the day rate and an assumed number of working weeks. The second is the accounts route, where a lender reads the company accounts or tax returns and assesses income from salary and dividends. The two methods can produce very different numbers for the same person on the same day rate.

The divergence matters because mortgage affordability is usually calculated as a multiple of assessed income. If one lender assesses a contractor at £103,500 and another at £47,500, the borrowing supported at the same income multiple differs by hundreds of thousands of pounds. The day-rate method is not universally available. Some lenders use it, some do not, and the criteria attached to it vary. The accounts route is more widely used but can understate a contractor's true earning capacity, particularly where profits are retained in the company rather than drawn as salary and dividends.

The day-rate formula

The standard formula is day rate multiplied by 5 working days multiplied by 46 weeks. The figure 46 is the weeks assumption used by most lenders that offer the day-rate method. It is not a statement about how many weeks a contractor actually works. It is a policy choice that builds in an allowance for holiday, illness and gaps between contracts. The reduction from 52 weeks to 46 weeks is therefore a prudential adjustment, not a reflection of the contractor's actual working year.

The weeks figure varies across the market. Most lenders use 46, some use 48, and the range reported across the market is 41 to 52. A higher weeks figure produces a higher assessed income and therefore supports more borrowing, all else being equal. A worked example shows the effect. At £450 a day, the calculation is £450 x 5 x 46, which gives £103,500 of assessed income. At a 4.5 times income multiple, that supports roughly £465,750 of borrowing. At 48 weeks, the assessed income is £108,000 and borrowing is about £486,000. The two-week difference is worth around £20,000 of borrowing capacity.

Hourly rates are converted using an assumed working day, so an hourly rate is typically multiplied by the number of hours in a standard day before the weekly and annual figures are applied. Part-week contracts scale accordingly. A contractor working three days a week at £800 a day is assessed as £800 x 3 x 46. Some lenders also set a minimum day rate for the contractor method, reported to range from around £300 to £500 a day. Below that threshold, the lender may decline the day-rate route or fall back to an accounts-based assessment.

What history and contract terms lenders want

Lenders using the day-rate method typically want 6 to 12 months of contracting history. Some may accept less where the contractor has prior employment in the same field, on the basis that the occupational history supports the sustainability of the contract income. The history requirement is about demonstrating that contracting is an established pattern rather than a short-term arrangement. A contractor with six months of history in a new field may be treated differently from one with six months of history after ten years in the same industry.

The current contract also matters. Lenders typically want a current contract with time remaining, usually at least three to six months. A contract that expires shortly after application may not satisfy the lender that income will continue. Gaps between contracts are also assessed. Lenders using the day-rate method typically tolerate gaps of no more than six to eight weeks. Longer gaps can weaken the case for the day-rate route or push the application towards an accounts-based assessment.

These criteria are not uniform. Some lenders are more flexible on history where the contractor's skills are in demand, and some are stricter on contract length. The practical effect is that two contractors with the same day rate can face different outcomes depending on how their contract history and current terms match a particular lender's policy. That is why the assessed income figure, not just the headline rate, is the number that determines what a lender will offer.

How contract type changes the assessment

Contract type changes how the day rate is treated. For an outside IR35 contractor working through a personal service company, the gross contract rate is generally used. The lender annualises the gross day rate without deducting company costs, on the basis that the contractor controls how income is extracted. For an inside IR35 contractor working through an umbrella company, treatment varies. Some lenders use the gross rate, while others use the post-deduction payslip figure. The difference can be substantial, because umbrella deductions for tax and employer national insurance reduce the amount that reaches the contractor.

CIS subcontractors are often assessed on gross CIS income. The gross figure is used even though tax may be deducted at source, because the lender is assessing the value of the contract rather than the net amount received. Fixed-term employees may be treated as employed or as contractors depending on the lender. Some lenders will assess a fixed-term employee on an annualised salary, while others will apply contractor criteria. The classification can change the income figure used and the documentation required.

Hourly and part-week contracts are handled within the same formula. An hourly rate is converted to a day rate using an assumed working day, and a part-week contract scales the weekly figure. A three-day-a-week contract at £800 a day is assessed as £800 x 3 x 46, which gives £110,400. The same logic applies to any pattern that is less than five days a week. The lender is annualising the contract as written, not assuming a full five-day week where the contract does not provide one.

Documents to prepare

The documents a lender wants for a day-rate assessment typically include the current contract and an assignment schedule. The contract shows the day rate, the contract length and the time remaining. The assignment schedule, where one exists, shows the pattern of work and any renewals. Previous contracts are often requested to demonstrate a history of contracting. A CV may be used to show occupational history and to support the case where the contractor has prior employment in the same field.

Bank statements are commonly requested to show that contract income is being received. Identification documents are required as standard. Where the contractor operates through a personal service company, the lender may also ask for company accounts or confirmation of the company structure. Where the contractor works through an umbrella company, payslips may be requested in addition to the contract. The exact list varies by lender, but the underlying purpose is the same: to evidence the day rate, the contract terms and the continuity of work.

Preparation matters because the day-rate method depends on the lender accepting the contract terms as the basis for assessment. If the contract is near expiry, or if there is a gap in the history, the lender may decline the day-rate route. Having the documents ready does not change the criteria, but it allows the assessment to proceed on the correct basis rather than defaulting to an accounts-based figure that may be lower.

Comparing lenders on assessed income, not rate

The choice between the day-rate method and the accounts route is a lender decision, and so is the weeks assumption. A contractor cannot choose to be assessed at 48 weeks rather than 46, and cannot insist that a lender use the day-rate method rather than accounts. What a contractor can do is compare how different lenders assess the same contract. The same £450 day rate can produce an assessed income of £103,500 at 46 weeks, £108,000 at 48 weeks, or about £47,500 on the accounts route where salary and dividends total that amount. At a 4.5 times multiple, those figures support roughly £465,750, £486,000 and £214,000 respectively.

That comparison is more informative than comparing headline mortgage rates, because the assessed income determines the maximum borrowing before the rate is applied. A slightly higher rate on a larger loan may be preferable to a lower rate on a smaller one, depending on the borrower's needs. The figures used here are illustrations, not quotations, and the multiples and criteria vary by lender. The practical point is that the assessment method and the weeks assumption are the variables that move the borrowing figure most, and they are set by the lender rather than the contractor.

Source: HMRC IR35 guidance.

Related coverage on Kael Tripton: Construction and subcontractors pack, Contractor insurance: what end clients and agencies require, and the IR35 link, UK IR35 Rules Explained: Inside vs Outside, Construction Payroll Software UK 2026: CIS, CIJC and IR35 Compliance, UK Umbrella Company Explained: How It Works.

Frequently asked questions

What is the standard day-rate formula for contractor mortgages?

The standard formula is day rate multiplied by 5 working days multiplied by 46 weeks. The figure 46 is the weeks assumption used by most lenders that offer the day-rate method. It is a policy choice that allows for holiday, illness and gaps between contracts, not a statement about how many weeks a contractor actually works.

Why do lenders use 46 weeks rather than 52?

The reduction from 52 weeks to 46 weeks builds in an allowance for holiday, illness and gaps between contracts. Most lenders use 46, some use 48, and the range reported across the market is 41 to 52. The weeks figure is a lender policy choice, so the same day rate can produce different assessed incomes at different lenders.

How much difference does the weeks assumption make to borrowing?

At £450 a day, 46 weeks gives £103,500 of assessed income, supporting roughly £465,750 at 4.5 times income. At 48 weeks, the assessed income is £108,000 and borrowing is about £486,000. The two-week difference is worth around £20,000 of borrowing capacity. Figures are illustrations, not quotations.

How does the accounts route compare with the day-rate method?

A limited company contractor who draws a £12,570 salary and £35,000 of dividends is assessed on about £47,500, supporting roughly £214,000 at 4.5 times. The same contractor on a £450 day rate could be assessed at £103,500 on the day-rate route, supporting about £465,750. The accounts route can therefore produce a much lower assessed income.

What history and contract terms do lenders want for the day-rate method?

Lenders using the day-rate method typically want 6 to 12 months of contracting history, sometimes less where the contractor has prior employment in the same field. They also want a current contract with time remaining, usually at least three to six months, and gaps between contracts of no more than six to eight weeks. Some lenders set a minimum day rate, reported to range from around £300 to £500 a day.