Contractor mortgage
for umbrella company contractors

If you have decided to move to the IT contracting industry or work as a locum or an independent professional, there two ways the client can offer contracts: 

  1. Direct contracts – There is a contract between the client company and the contractor’s own limited company. The client company will pay the contractor directly.
  2. Via agencies – This is an indirect method where a recruitment agency is involved. There is a contract between the recruitment agency and the client’s company. There is another contract between the recruitment agency and the contractor’s limited company.

What does a contractor under IR35 mean?

IR35, also called the intermediary legislation, is tax legislation that was introduced to prevent tax avoidance. The law covers contractors operating via a limited company that works very similarly to employees. However, they make tax savings. Her majesty’s Revenue and Customs (HMRC) considers such contractors as “disguised employees.”

There is some ambiguity in distinguishing the difference between whether a contractor is inside or outside IR35. April 2021, with the introduction of off-payroll legislation, the responsibility in deciding the status will be with the private sector clients. The rules were introduced in the public sector three years ago.

In short, a contractor who operates very similar to a permanent employee is classified as a contractor inside IR35. The client will make the judgment and communicate this to the contractor. 

What are the options that are available if you are within IR35?

If a contract worker is within IR35, there are two ways one can continue to be employed:

Umbrella company – This is an arrangement where a contractor becomes an employee of a chosen umbrella company. The umbrella company ensures that all necessary income taxes and National Insurance contributions are deducted before remitting the salary.

PAYE- Under this method, the employer is usually responsible for ensuring the necessary deductions are paid out of the salary. 

What are the issues when using an umbrella company or applying for a PAYE contractor mortgage?

High street banks and building societies have traditionally been comfortable with contractors who work with limited liability companies.

Day Rate Contractors operating via a limited company can use their day rate as a base to prove their annual income. The day rate route worked well for the contractors as they were able to borrow even if they were a new contractor with little trading history.

With the IR35 changes, most contractors have to move to an umbrella or fixed-term contract structure. The present mortgage lending criteria with most mortgage lenders are less flexible with these structures. 

Is an umbrella company better or a fixed-term contract better?

This depends on your circumstances.

An umbrella company will employ a contractor under one contract of employment regardless of the number of assignments carried out. Thus reflects a continuous track record of work. This can be advantageous for mortgage applications as high street lenders and building societies may prefer this. 

However, the contractor may not have a choice for deciding this. Most clients would not want the administrative burden of a fixed term contract, and therefore most contractors will end up working through an umbrella company. 

Can I still apply for a mortgage this way?

Yes, you could obtain a mortgage given that the lenders’ criteria and affordability requirements are satisfied. However, there would be a lesser number of mortgage providers who have embraced this idea at present, meaning some turn to specialist lenders..

As it stands today, most mortgage lenders are less likely to prefer new contractors with less than three months’ track record under an umbrella structure. 

How do we prove your income?

An umbrella company worker will be treated similarly to an employee, and payslips will be required when assessing income. However, the lender will want to see if the contractor has been in the same line of work and can demonstrate they have work lined up for the future. 

Umbrella companies will take the contract rates appearing on the contract. The day rates will be broken into minimum statutory pay and the rest of the income in the form of bonus and a commission. The income structure may have to be explained to lenders as each umbrella company uses slightly different structures. 

As the employer pays tax, the lender will class them as employed and request three months’ payslips and the P60. 

What determines the eligibility?

The new implementation of IR35 has caused changes in the mortgage sphere. Some high street lenders and building societies have been slow in making changes to their lending criteria to accommodate the new change. 

Hence, not all the high street lenders are ready to deal with an umbrella company structure. Some lenders consider contractors working under an umbrella company the same as zero-hour employees and will assess the contractors’ income looking at the past year. 

Some lenders would consider your day or an hourly rate if you are a high-income earner irrespective of whether they class themselves as Employed, Self Employed, or operate as an Umbrella Company.

Are you moving from a limited company to an umbrella?

Contractors who operate via a limited company are able to use their annual gross contract value into the affordability calculations. The lenders used a daily or the weekly rate earned, multiplied by the predetermined number of days assumed to have worked in a year (this multiple depends on each lender) to enumerate the annual income of such contractors. 

If a contractor has joined an umbrella company from a limited company structure, it can help demonstrate continuity. 

However, one of the concerns from the lenders’ point of view could be the reduction in disposable income. Therefore, the mortgage lender may want to reduce the mortgage loan.  

How difficult is it for umbrella company contractors to go for a mortgage?

Being under an umbrella structure might confuse lenders assessing income and may take a lower income compared to the limited company route. This is because high street lenders and building societies may perceive such mortgage applications to be “riskier.” 

Given the above, some umbrella company contractors may struggle to secure a mortgage. Therefore, it is advisable to contact a specialist mortgage broker to assist you. 

What do mortgage lenders expect from umbrella contractors?

Umbrella company contractors must have a sound track record of being employed in the same line of work. 

Work history demonstrating continuity of work with fewer gaps in between contracts

A copy of the signed contract with the client, pay-slips, curriculum vitae may be required to verify the mortgage applicants’ income. 

How much can I borrow?

This depends on your annual income, expenses, and other financial commitments. 

Income assessments for Umbrella company workers are similar to that of permanent employees in many ways (employed mortgages). They need to work out the annual income. Some mortgage lenders will look at your day rate and work out the year’s gross contract value when determining your income. Others will look at an average of your three month’s earnings and annualise it. Some will look at your past 12 months of the umbrella company income.

Mortgage lenders will also look at your expenditure. Expensive hobbies and expensive lifestyle spending will reduce your borrowing capacity. The same goes for financial commitments such as monthly loan commitments, credit card balances, and other commitments such as childcare and private school fees. 

The amount one can borrow also depends on the clauses in the contract, statutory rate, and the number of hours a contractor works. 

We at WIS are mortgage brokers who consider each mortgage applicant to be unique. Bespoke underwriting may be required for umbrella company workers. A mortgage advisor will discuss the complications with the underwriters of the banks directly if needed, and advise and provide you access to the most suitable product. We are a whole of market broker and work as a part of a mortgage club therefore, from time to time, will have exclusive offers from banks. We also help with buy to let applications for umbrella company employees. 

We at WIS are specialists in all areas of contractor mortgages and aim for a hassle-free mortgage experience. We like to call ourselves a digital mortgage broker and use the latest technology to speed up your application and reduce paperwork. We will monitor your mortgage from application through to completion and will send you updates as and when required. 

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