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Can I apply for a mortgage as a contractor inside IR35?

Yes, you can still get a mortgage being on a contract which is inside IR 35.

IR 35 was a legislation that was introduced by Her Majesty’s Revenue and Customs (HMRC) to prevent contractors and freelancers from exploiting the tax benefit by being classed as a limited company. Tax legislation states that day rate contractors with similar working practices to an employee is classified as a contractor inside IR35. A day rate contractor inside IR35 is likely to have to work through an umbrella company or join their client’s payroll. Traditionally these freelancers would work via a limited liability company, responsible for their financials pay their own taxes.

Day rate contracting or hourly rate contracting is very popular with IT contractors who work on short projects. It is also popular among professionals such as doctors and dentists who work as a locum.  Other professionals who work as freelancers use this route too.

 

What are the types of IR35 contractors?

Broadly, there are three types of IR35 contractors who work inside IR35.

  1. Contractors working via a limited liability company who is a deemed employee
  2. Umbrella company worker or an umbrella company contractor
  3. Fixed term contractor on a client’s payroll

Is IR35 a new change in legislation?

IR 35 tax laws were introduced around 10 years ago. However, rules were changed in 2017 and these changes were rolled out to the public sector in that year. These rule changes are commonly known as off payroll legislation rule changes in the contracting circles. High street banks and building societies have witnessed contractors working inside IR35 as a deemed employee or through an umbrella company for three years at least. Fixed term contracts are rare in the contracting world. However, these types of contractors have been around for much longer.

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What is off payroll IR35 changes in the Private sector?

The public sector off payroll rule changes was meant to be a pilot project in 2017. In April 2020 the same changes were meant to be rolled out to the private sector. However, the coronavirus pandemic forced the government to postpone the roll out until April 2021 at the eleventh hour. At this point, some clients had already assessed their contractors IR35 status. Some clients who assessed contractor’s to be inside IR35 adopted to the change and extended their contracts. Unfortunately, not all clients reversed their decision on IR35.

 

 

How does being in an inside IR 35 contract affect your mortgage?

Before the IR35 legislation change most banks and building societies were happy with the gross contract value for most day rate contractors. Using contract rates benefited the contractors as it was flexible.

IR35 has caused intricacies and not all high street banks have been able to find a solution which is flexible as before. Some mortgage lenders have explicitly conveyed their stance on IR35 and how they will assess such applications. However, other banks and building societies are yet to incorporate these changes into their lending criteria. Unfortunately, a lesser number of mortgage providers accept contracts inside IR35.

From a lender’s perspective, a borrower contracting through their limited companies had more disposable income. This is because they withdrew minimum salary and dividend and contractors shared income with their spouse, therefore, paid less national insurance. Now the same fixed term contractor on PAYE or contracting via an umbrella company has lesser disposable income. The other concern is that lifestyle spending or expensive hobbies might not be able to be cut down which makes the day rate contractor more financially vulnerable. This may lead to you not being able to keep up with the monthly mortgage payments.

Does being inside IR35 change my affordability?  

IR35 changes may mean some umbrella company contractors or fixed term contractors may struggle to match their loan requirements to a mortgage providers’ affordability as per their lending criteria. This affects a new or first-time contractor more. Therefore, IR35 changes may not help you buy the house you desire. For a day rate contractor remortgaging his also means that you may have to remain with your existing lender and not being able to benefit from switching to a better rate with a different lender or borrow extra.

For a deemed employee working inside IR35 via a limited liability company, the affordability may not change too much as they still continue to work through a company.

How can we help you to overcome these barriers?

As specialist a fintech mortgage broker we understand that your individual circumstances may differ.

Given the complexities caused by IR 35 legislation changes we understand that it is difficult to directly secure a mortgage by matching the unique aspects of your circumstances against the lending criteria of the bank’s mortgage application. As a mortgage broker, we evaluate your income, expenses, and financial commitments before applying for a mortgage on your house. We have worked with public sector IR35 contractor mortgages and have experience dealing with contracts inside IR35. 

As digital mortgage brokers we intend to ensure a hassle free mortgage process and eliminate the possibility of banks and building societies declining your application which affects your credit rating and further reduces your affordability or a decline with another lender.

Most mortgage lenders will require the day rate contractor to demonstrate a history of being in the same line of work for 2 to 3 years. The Mortgage provider will also check how long the contractor has operated under the umbrella company or as a PAYE and also check the clauses on the contract. As brokers, we check this beforehand reducing the chance of rejection. It is also important to note that the approach that each lender takes in processing your mortgage application, determining the personal income would be different from contractor to contractor. Even though a broker cannot guarantee, it is important that your mortgage application is carefully assessed and match the requirements of the mortgage lender.

We at WIS consider each mortgage application to be unique, discuss the complications with the underwriters of the banks directly if it is required, and provide you with the most suitable interest rate possible as we operate whole of the market.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.

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