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Does taking an inside IR35 contract affect future mortgage applications?

‘Does taking an inside IR35 contract affect future mortgage applications?’ is a relevant topical question, and I understand the catalyst for it. It comes at a time when Halifax has clarified its lending criteria for all types of employees, writes John Yerou, CEO of Freelancer Financials.

As there is no mention of IR35 in Halifax’s new lending criteria, it’s right to question the legislation’s bearing on future mortgage applications. But there’s a reason IR35 isn’t mentioned, and, when you think about it logically, you’ll get the gist, too.

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Using Halifax as the yardstick by which to measure other lenders

For the purposes of answering this question, I’m going to use the new Halifax terms as the fallback position. That’s because, time and again, Halifax has led the way in contractor mortgages.

Their new criteria show just how open they remain to independent freelance and contract professionals, despite all the new risk factors lenders are facing in the wake of the ongoing covid-19 pandemic. I also think that it won’t be long before more contractor-friendly mortgage lenders follow a similar path to the Halifax’s.

The caveat against which all this advice is given

Before I go on, let’s emphasise something key. There is no overarching law that tells banks and building societies how to deal with self-employed applicants. At any given time, any number of lenders might provide the best option for you, whether you’re inside IR35 or not.

So there is no ‘x + y = z formula’ we can apply across the board. Deals change daily. Some lenders are more amenable to time taken off between contracts, or will offer a higher ‘income multiplier’ than others.

Yet others may provide a specific product, maybe an offset mortgage, that might suit your situation best. You’re always, without exception, best off calling a contractor-specialist mortgage broker before approaching a lender direct yourself.

Treating contractors as employees

What’s clear from Halifax’s updated lending criteria is that once a contractor reaches a certain point in their contracting career, the lender will (in effect) treat them as an employee on PAYE.

The basic conditions a contractor must meet to secure this treatment, are that they must:

  • either earn £500 per day/£75k-per-annum or be an IT Contractor (any income);
  • have racked up >12 months continuous employment, plus have >six months remaining on their current contract, or
  • at time of application, have two years’ continuous service in the same line of work

Additionally, if the client or umbrella company for whom the contractor works pays their tax, Halifax will treat them as an employee.

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How does this help answer how IR35 affects mortgage applications?

Think about this dynamic from a role reversal aspect. When a mortgage adviser asks a PAYE employee what their income is, the employee doesn’t give them their amount after tax. They give them their gross annual salary. Similarly, the adviser doesn’t go through payslips looking for deductions; they just want proof that the employee is consistently earning and banking what they claim.

It’s the same for contractors. Lenders annualise their gross day rate to work out an equivalent ‘salary’ for their affordability calculations. Once they’ve established that top line annual figure, and proved it with bank statements, that’s it. They won’t go into deductions.

Even if a contractor is working inside IR35, the difference between what an IR35-caught individual and a PAYE employee on the same rate would ‘take home’ is negligible.

IR35, against updated criteria, becomes a moot point, which is why we:

  1. jumped on ‘that’ LinkedIn rumour in the first place, and
  2. didn’t mention IR35 in our previous article for ContractorUK setting out Halifax’s lending criteria, as all it does is muddy the waters!

If you come up against a mortgage adviser or broker who asks you about your IR35 status as part of your home loan application process as a contractor, you now have an argument to combat their objections! If they persist, then you’re probably talking to a mortgage lender that’s not perhaps as contractor-friendly as they claim. In short, do yourself a favour and talk to us instead!

The answer you’ve been searching for all this time…

If you’ve skipped to the bottom of this article in the hope of quickly finding out the answer to the question — ‘Does taking an inside IR35 contract affect future mortgage applications?, here’s the answer you’re looking for:

Answer: No. IR35 only affects the way you’re taxed. For mortgage purposes, you will be assessed the same way as before, depending on whether you operate through a limited company or an umbrella company.

Written by John Yerou

Source: Contractor UK

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Majority of lenders accepting applications from self-employed borrowers

New research from the Intermediary Mortgage Lenders Association (Imla) shows that most – 88% – of lenders are willing to extend funds to the self-employed.

Imla asked 24 lenders a series of questions regarding underserved borrowers, finding that, “Despite ongoing consumer concerns that only borrowers with straightforward incomes and perfect credit histories can access mortgage lending,” many lenders are in fact open to borrowers with more complicated financial histories.

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Specifically related to the self-employed, Imla discovered that criteria here has changed over the last 18 months.

The report show that 16% of lenders have reduced the period for which earnings must be shown, with 21% disregarding the 2020/21 tax year in favour of pre-covid accounts. And 25% of lenders will accept predicted revenues on these applications.

Moreover, 21% of lenders have changed their criteria for the sake of borrowers on furloughed income or those who had to go on a mortgage holiday, and 29% of lenders have altered their criteria to accept bonus, overtime or commission income in mortgage applications.

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Overall, 71% of lenders will consider borrowers with ‘irregular’ income and 63% will accept applications for multiple borrower products. Just under half, meanwhile – 46% – will look at potential borrowers with credit impairments in their history.

And regarding lenders themselves, 67% said that, since the start of the pandemic, they have invested in expanding their underwriting teams and 42% have grown their overall staff.

Just under half – 46% – have made investments in technology, meanwhile.

Imla executive director Kate Davies says: “2020 was the year everything was turned upside down – including the mortgage sector.

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“Lenders and intermediaries responded very well given the difficult circumstances and were able, in a remarkably short timescale, to continue to offer support and services to customers. This included millions who accessed payment holidays. This meant that, for a brief period, the range of mortgages offered needed to be reduced, but lenders are back in business with a full and very competitive range of products back on the market.

“Lenders are also very aware that, as we emerge from the worst of the crisis, borrowers who may previously have had non-standard financial circumstances may now have even more complex profiles. Lenders have responded to this – and there are now around 5,000 mortgage products on the market.”

By Gary Adams

Source: Mortgage Finance Gazette

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Can you get a mortgage if you’re self-employed?

With some high street banks turning away self-employed mortgage applications from those who have taken out government Covid grants during the pandemic, and a recent report from Shawbrook Bank revealing that 35% of borrowers are unsure if they will get a mortgage due to being self-employed, many consumers may feel that being self-employed is a barrier to homeownership.

In fact, the research from Shawbrook Bank found that although 23% of borrowers were unsure if they could get a mortgage if they were self-employed, while a further 12% believed that being self-employed would result in a mortgage rejection. Meanwhile, some self-employed applicants have found that high street banks have turned down their mortgage applications due to taking out the government’s self-employment income support scheme (SEISS) grant.

Although being self-employed may make it harder than an employee to get accepted for a mortgage, being self-employed is not a complete barrier to homeownership. Here are some ways those who are self-employed can help to ensure that their mortgage application is accepted.

Have the right financial records

A mortgage lender is most interested in whether the borrower can make the repayments needed on the mortgage. While this is usually easier for employees to prove – they just need to show their wage slip – for those who are self-employed this can be harder to prove, especially as their income may vary month-to-month. As such, those who are self-employed will need to show a larger number of financial documents. For those who are self-employed, this means providing various documentation to help evidence your financial position. This includes two or more years of certified accounts, tax calculations and tax year overview, bank statements, proof of address, and your last mortgage statement (if you’re remortgaging). Some lenders may ask for further documentation later down the line, for example, if you’re a contractor, lenders may review past and future contracts. Either way, getting everything in order well in advance will help smooth the process.”

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Be in a strong financial position

Along with wanting to ensure that borrowers have the income needed to meet repayments, mortgage lenders also want to make sure that the mortgage is affordable given the applicant’s outgoings. As such, getting finances in order before making an application will help to improve chances of getting accepted for the mortgage. For example, paying off outstanding debts, such as credit cards or personal loans, can help to improve the borrower’s attractiveness to mortgage lenders. As well as this, improving credit scores can also help to boost the chances of the application being accepted. Mortgage applicants should consider checking their credit score online – which they can do for free here – and work towards improving their score if needed. “A good credit history will stand you in good stead when it comes to dealing with lenders,” revealed Murphy. “Keeping up with credit card payments, paying bills on time, or closing any unused bank accounts in the run up to your application will help with this. If you can show you have a good credit score, you’ll be in a great position for getting a mortgage.” For tips on improving credit scores read our guide on how to improve your credit score.

Save for a large deposit

Rising house prices may make it harder to save for a deposit, but if possible, saving for a large deposit of 15% or more will help to increase the chances of the mortgage application being accepted, particularly for those who do not have a long history of financial records. Using a Lifetime ISA (LISA) can be a good way of boosting savings when saving towards the deposit for a first home as a 25% Government bonus is added to deposits each year, up to a maximum of £1,000 per year. Those considering a LISA should, however, be aware that the money saved must be used towards the deposit of a first home, or during retirement, and if withdrawals are made for any other reason a hefty penalty fee is charged. For more tips on saving towards a house deposit read our guide on savings for your first home.

Use a mortgage broker

Using a mortgage broker can help to improve chances of the application being accepted as they will not only be able to guide applicants through the process, including ensuring they have all the relevant documents needed, but will also be able to highlight deals that are more likely to accept applications from those who are self-employed.

By Derin Clark

Source: Money Facts

For more information on getting a contractor mortgage click here.

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How to get a mortgage when self employed

Can the self-employed get a mortgage?

Yes, self-employed workers can apply for a mortgage in the usual way, with many lenders accepting self-employed income and some even specialising in self-employed mortgages. At one time, self-certification mortgages were available that allowed self-employed borrowers to declare their income without providing proof, but these were banned in 2014.

These days to get a mortgage when you’re self-employed, you’ll have to prove your income to lenders – which we’ll discuss in more detail below – but you may also need to make yourself a more attractive lending prospect than if you were employed. This means you’ll probably be expected to provide a more substantial deposit than may normally be required or if you’re remortgaging, you’ll need to own a large amount of equity already. A high credit rating will also mean you’re less risky in the eyes of lenders. If you’re not sure where you stand credit-wise, make sure to check your credit report in advance, and spend the time to improve your score if necessary.

It may also be worth utilising the services of a mortgage broker. They’ll know the lenders that are most likely to accept self-employed borrowers and will have links to specialist lenders too, not to mention access to deals that are not available direct from lenders to borrowers. This, together with knowledge of how to navigate the process, could make it much easier to secure that all-important mortgage deal as a self-employed borrower.

Is it harder to get a mortgage if self-employed?

Yes. Your income isn’t guaranteed, and although you’re required to prove how much you earn, it isn’t certain that your income will stay at that level during the term of the mortgage. As such, providers may be less willing to lend to you, and you may have to pass stricter affordability criteria – or jump through a few more hoops to prove your creditworthiness – as a result. This may seem unfair in some respects, but it’s designed to ensure that you can afford the mortgage; the days of self-certification saw many borrowers take on mortgages that were unaffordable, and since the Mortgage Market Review was implemented in 2014, lenders have tightened their lending criteria and have an obligation to lend responsibly.

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How many years of accounts do I need for a self-employed mortgage?

You’ll need at least two years of certified accounts in order to comfortably apply for a self-employed mortgage, and preferably three years or more if you want access to the best deals. Ideally, these accounts should have been prepared by a qualified and chartered accountant to prove your reliability. If you’ve only got accounts for one year or less, it may be more of a challenge to prove that you can afford a mortgage. A mortgage broker can be particularly helpful in this scenario to find a mortgage deal for you. You can improve your chances if you can show that you’ve got regular work and/or evidence of future commissions to show how you’re planning to maintain your income.

How to prove self-employed income for a mortgage

You’ll need to provide a lot more evidence of what you earn if you’re self-employed than if you had an employer, simply because you don’t have anyone else to back up your claim. You’ll need to show SA302 statements – which provide evidence of your earnings and tax paid after submitting your self-assessment tax return – or tax year overviews for the preceding two or three years, which can be obtained from HMRC. Some lenders will require you to see your full accounts too.

If you’re a contractor you’ll also need to show evidence of current and any upcoming contracts (which lenders may use to estimate your annual income), and if you’re a company director, you’ll be expected to show proof of dividend payments or retained profits. No matter which category of self-employment you fall under, lenders will typically focus on average profit over the preceding two years to determine your mortgage eligibility, though they all have different methods. Income multiples and/or assessments of affordability will then be used to determine how much you’ll be able to borrow.

Yet it isn’t only evidence of your income that you’ll need to provide. As is the case for all borrowers, lenders will require several other documents too, including your passport and driving licence, council tax bill and recent utility bills to verify your identity, as well as six months’ worth of bank statements. The latter will be scrutinised, and you may be asked to provide more detail in certain areas – particularly around other borrowing commitments, childcare costs, household bills and other outgoings – to prove affordability.

Are self-employed mortgages more expensive?

Not necessarily. As with all mortgages, the rate that you’re offered will depend on your level of deposit/equity, your credit score and your income. As long as the mortgage lender is provided with enough evidence for the latter, there’s no reason that you can’t be offered the same deal as someone in a comparative salaried position. However, that’s not to say that it won’t be a challenge, and some people may find it difficult to be accepted by mainstream banks. In this case, they may have to approach specialist lenders where rates can be higher. However, to find the best deals it all comes down to comparing the options and boosting your chances of getting approved for a mortgage.
You can also speak to a broker to access their knowledge of those lenders most likely to accept you and to find the best deals.

By Leanne Macardle

Source: MoneyFacts

For more information on getting a contractor mortgage click here.

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Getting A Mortgage When You’re Self-Employed

There are more than five million self-employed people in the UK, according to the Office for National Statistics (ONS). Yet getting a mortgage when you work for yourself can be more complicated than if you’re an employee working for a company.

Here’s what you need to know.

Can I get a mortgage if I am self-employed? 

You can get a mortgage if you work for yourself. However, lenders prefer job stability and the predictability that comes from a reliable income.

If your income tends to fluctuate from month to month – as it often does if you’re self-employed – lenders may be more nervous about letting you borrow. Because of this, you’re likely to need to provide more evidence of your income to get accepted for a mortgage.

How to apply for a self-employed mortgage

If you’re applying for a self-employed mortgage, you will need the following documents to prove your income:

  • Two or more years of certified accounts
  • SA302 forms or a tax year review from HMRC for the past two to three years 
  • Evidence of upcoming contracts if you’re a contractor
  • Proof of dividend payments or retained profits if you’re a company director.

You’ll also need:

  • Bank statements for the past three to six months
  • Proof of ID, such as your passport or driving licence
  • Proof of address, such as a council tax or utility bill.

Do your accounts have to be from an accountant?

Especially if your financial affairs are complicated, most lenders will insist that your accounts have been complied by a chartered or certified accountant (which means they are part of a professional body).

In any case, using one can only boost chances of being accepted for a mortgage. 

Note however, that while many accountants will legally reduce your declared income so that you pay less tax, your accounts will show a smaller profit as a result, which could affect your affordability when it comes to a mortgage application.

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How does affordability work?

The introduction of the Mortgage Market Review (MMR) back in 2014 meant that lenders must now comprehensively check whether you can afford a mortgage, both now and in the future too.

As part of this assessment they will “stress test” your finances to see whether you would still be able to afford your mortgage if interest rates were to increase (to 3% above what the lender’s mortgage deal reverts to).

To ensure you won’t be overstretching yourself, lenders will look at both your income and how you spend your money. 

Your bank statements will be examined to assess how much you spend on household bills, childcare costs and commuting. Lenders will also consider how much you spend on holidays, socialising and hobbies, as well as whether you have any debts to repay and how much these are. 

Do all lenders want the same?

Although lenders must all follow the same rules, they won’t all have the same criteria.

This means that where one lender might turn you down, another might accept your application. For this reason, it’s important to check eligibility criteria carefully before applying.

You may also want to seek help from a mortgage broker.

Should you use a broker? 

There’s no requirement to use a mortgage broker to help you with your mortgage search. But, especially when you are self-employed, it can help to ensure you’re matched with the most suitable lender and deal.

Brokers have inside knowledge of each lender’s criteria and preferences, which can ensure you don’t waste your time applying for a mortgage you have no chance of being accepted for. 

Brokers will also manage your application and arrange the necessary paperwork, which can make the process much easier.

Many brokers do not charge the customer a fee for their services, taking their commission from mortgage lenders instead. However, check they are independent and have access to the whole of the mortgage market rather than just a selected panel of lenders. 

How your self-employed mortgage will be assessed 

If you’re self-employed, your situation will generally fall into one of three categories, and this will affect how you’re assessed.

  • Sole traders – if you’re a sole trader, you will need to declare your income using self-assessment and have your tax calculated by HMRC. You’ll need to submit this on a SA302 form which lenders will use when calculating what you can borrow
  • Partnership – if you’re in business with someone else, lenders will look at your individual share what profit it makes
  • Limited company – as a director of a limited company, lenders will look at both your salary and dividend payments when it comes to affordability. But note that not all lenders will factor in profits to their calculations, should you choose to retain any

Is it gross or net income the lender looks at? 

If you’re a sole trader or freelancer, lenders will usually look at your net profit over the past two to three years. An average is then taken from those figures. 

For contractors, lenders may take an average of your income over the past few years, or your annualised day rate may be taken into account.

If you’re a limited company, lenders will look at your share of net profit or your salary and dividend payments. 

What if your business has suffered because of Covid-19? 

In the wake of the Covid-19 pandemic, many lenders have tightened their criteria even further.

As a result, you may be asked to provide details of your turnover for the past three months as well as historic accounts so that lenders can see exactly how your earnings have been affected. 

Applications are usually looked at on a case-by-case basis, and some lenders may be more lenient than others. Using a broker may help you to find a lender that is more likely to accept your application.

Are the same mortgages available to the self-employed? 

These days self-employed people can choose from the same mortgages as anyone else, so there’s no such thing as ‘self-employed mortgages’. 

Traditionally, however, ‘self-certification’ or ‘self-cert’ mortgages were available. These were specifically designed for those unable to provide proof of their regular income, making them a popular choice for the self-employed. 

The Financial Conduct Authority (FCA) banned self-cert mortgages in 2014 due to concerns borrowers were being approved for mortgages they couldn’t afford to repay. 

Tips to boost your chances being accepted

There are several steps you can take to increase your chances of getting accepted for a self-employed mortgage:

  • Save for a bigger deposit: As with any type of mortgage, the more you can save up for a deposit, the more likely you are to get accepted for a mortgage and secure the best interest rates
  • Check and improve your credit score: Before applying for a mortgage, check your credit score by using one of the fee-free services available online. Lenders use your credit score to determine how reliable you are as a borrower, so the better it is the more likely you are to get accepted
  • If your credit score is poor, take steps to improve it such as checking you’re on the electoral roll, paying bills on time, spacing out credit applications and correcting any mistakes on your credit report
  • Get your paperwork in order: It’s important to ensure your accounts are up to date and have ideally been prepared by a qualified accountant before you apply. Ideally, you’ll need at least two years’ worth of accounts. 

Frequently Asked Questions

Who counts as self-employed?

Generally, lenders will view you as self-employed if you own more than 20% to 25% of a business from which you earn your main income. You could be classed as a contractor, sole trader, or company director.

Is it harder to get a mortgage when you’re self-employed?

It can be. But providing you have sufficient proof of income, a good credit score and a large deposit, you should still have a good chance of getting accepted.  

Do the self-employed pay higher mortgage rates?

Not necessarily. So long as you can provide adequate proof of your income, you should have access to the same mortgage rates as everyone else. You’re more likely to secure the best rates if you have a good credit history and large deposit.

If you’re struggling to get accepted by a mainstream bank, however, you may have to apply with a specialist lender which may charge higher rates. 

What can I do if I don’t have two years of accounts?

You may find it harder to get a self-employed mortgage if you don’t have two years of accounts. But your application may still be considered by certain lenders, particularly if you can prove you have already received regular work or that you have regular work lined up in the future.

It’s worth speaking to a mortgage broker to see if they can advise on lenders that may be more willing to accept those newly self-employed. If not, you may need to approach a specialist lender. 

Do self-certification mortgages still exist?

No – self-certification mortgages were banned from the UK market in 2014. 

By Rachel Wait

Source: Forbes

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