Published 1 August 2021 · Older article
New Contractor Mortgage after IR35 Umbrella Company Employee Mortgage & Daily Rate products
If you are reading this article you have probably been impacted by the IR35 tax changes from April 2021 affecting Contractor mortgages.
You are not alone…the taxation changes brought about by IR35 is thought to have impacted around 60,000 institutions and 170,000 people.
From a mortgage perspective enhanced affordability for “daily rate” Contractor mortgages was common place before April 2021. A typical assessment used the current “daily rate” rather than look at an average of annual figures on the Self-Assessment Tax Calculations (SA302s). This was obviously beneficial for Contractor mortgages at the time as applicants could borrow far more, however the ruling for April 2021 threatened to leave a generation underserved, and those looking to remortgage trapped.
The Mortgage Lenders have been slow to react with their responses for Contractor mortgages i.e. mortgage applicants who fall inside of IR35 or now under an “umbrella” company arrangements. In fact three major brands only made their announcements last week – some four months after April 2021 – but the fact that recognition is coming at all for Contractor mortgages is welcome.
Here is a flavour of the new found flexibility for Contractor mortgages:
- Use of current “daily rate” rather than an average across the last few years.
- Contractors in the same profession for a couple of years give greater comfort to Mortgage Lenders.
- The switch from Limited company to either umbrella or fixed term PAYE brought about by IR35 can be accepted as part of the 12 months duration of contracting to the same firm.
- Level of experience and nature of the occupation play a major part in the acceptance of contractors on “Rolling contracts without an end date”.
- Holiday pay isn’t deducted as an allowance for leave has already been factored in.
- Gaps between contracts need to be infrequent and for short periods. Evidence of savings to prove mortgage payments could be covered in void periods may be requested.
- The requirement for there to be a minimum of three months left on the current contract at the point of mortgage application is common. Extension letters of intent to renew can be sought from the firm you are contracting to.
- If Mortgage Lenders offer both Residential mortgages and Buy-to-let mortgages they normally apply the same policy for Contractor mortgages.
How is mortgage affordability applied for Contractor mortgages?
- It is important to remember NOT all mortgage lenders are actively supporting Contractor mortgages. Many see contractors as self-employed applicants and look at Tax Calculations or Accounts.
- Those that are supporting Contractor mortgages:
– Often Mortgage Lenders look for a minimum income, typically £50,000.
– They use 100% of the daily rate.
– For full time Contractors they would use a 5 day week.
– Then they typically multiply by 46 to 48 weeks – some Mortgage Lenders allow for more holidays.
– If the contract doesn’t specify the minimum number of contacted hours in a week then the Mortgage Lender may take a more cautious approach or look to bank statement credits to justify a typical 35 hour working week.
If you are outside IR35 and paid on a day rate, our guide to contractor mortgages on a day rate explains how lenders annualise your contract.
If you are after for Contractor mortgages why not watch our You Tube video on the subject or complete our Contact form on this website.