Marketing No Comments

How IR35 changes have affected mortgage affordability

The start of the tax year saw changes to the way some contractors pay tax under ‘IR35’ rules, and they are not without controversy.

The Association of Independent Professionals and the Self-Employed (IPSE) describes the IR35 changes as a “disaster” in the public sector, and claims they are already proving to be “just as devastating” in the private sector.

Under IR35, also known as off-payroll working rules, contractors who would have been an employee if they were providing services directly to a client, pay broadly the same income tax and National Insurance contributions as employees.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

Besides tax implications, the IR35 rules are having an impact on some mortgage applications.

Alan Overy remarks that with the reviews to IR35, an extra layer of scrutiny is necessary to establish if a person is “really an employee or is working for themselves as a true contractor”.

“Each lender will apply their own criteria and tests but it mainly boils down to how the individual pays their tax and the level of autonomy they have from the company in terms of their hours and location,” Overy adds.

Halifax for example, treats contractors as employed for income verification purposes if tax is paid by the company they work for, or they are employed via an umbrella company who deduct tax.

Alternatively, contractors can be treated by the lender as employed if they earn more than £500 a day or £75,000 a year, or are an IT contractor on any income, irrespective of whether they pay their own tax or class themselves as self-employed, with exceptions.

Mortgage Broker Tools’ chief executive Tanya Toumadj remarks that the changes could limit affordability based on income and structure.

“For contractors, previously lenders would take the day rate and turn it into a gross annual amount, using an assumption on the number of weeks’ work, usually 46 weeks.

“Now… the umbrella company will be [deducting] the tax and therefore affordability would decrease.”

As Qdos Contractor explains, umbrella companies act as a middleman and provide a payroll service to contractors. Additionally, some clients may require any contractors that come under IR35 rules to use an umbrella company.

An April survey by Qdos of contractors’ experience of IR35 reform found most (64 per cent) were given the option to continue working via an umbrella company.

When it comes to applying for a mortgage, Accord’s Alvarez observes how lenders’ requirements differ on the treatment of contractors.

“Some lenders will accept contractors, some won’t, and some will accept them under certain circumstances. And they have different requirements about how long somebody needs to have been in that type of work and what evidence they have to support that income,” says Alvarez.

According to Chris Sykes many lenders require a client to have one to two years’ experience of contracting under an umbrella company arrangement, even if they were to have years of contracting experience through different structures, treating them more like a newly self-employed individual.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Sykes says: “We have seen some examples where clients have tried to remortgage and have seen their affordability drop, with some lenders able to consider these new structures.

“But where previously a lender may have taken a view of £500 per day x 5 days x 46 weeks, now some will look at it as £500 per day, but take into account the umbrella company costs of 13 per cent, for example; so £435 a day x 5 days x 46 weeks. This could heavily affect someone’s affordability and borrowing power.”

Alex Beavis notes the implication of falling inside IR35 can reduce net income by up to 25 per cent.

“Where an application is on a more complex area of criteria such as this, using a mortgage helpdesk can assist with the initial placement of a case. Once a potential lender has been identified, then contacting the lender’s business development manager and using their knowledge and expertise can help,” Beavis adds.

“By talking the case through before submission, the lender’s BDM will know how best to present the adviser’s case and any additional information which may need to be provided to support a client’s application.”

Clydesdale Bank, for example, updated its lending criteria for contractors after IR35 rule changes.

In June the bank announced it would accept contracts that fall within IR35 rules, as well as contract income received via a payroll services (umbrella) company.

The lender’s announcement continues: “When a contractor is paid via an umbrella company, or falls inside IR35 and receives payslips, we need to see the last two months’ payslips, in addition to standard documentation.

“Any statutory employer costs (including employer NI contributions and Apprenticeship Levy) and any payroll service costs are deducted from gross pay before we multiply gross pay by 46 weeks.”

Gordon Hunter says they have seen more limited company contractors switch to umbrella companies, although such structures can create paperwork problems in the mortgage application process.

“If a contractor is now operating under an umbrella company for payroll, the payslip issued by the umbrella company usually states national minimum wage plus a bonus or commission payment to make up the difference. This is primarily due to the umbrella trying to keep employer costs, such as pension contributions, to a minimum,” Hunter adds.

“The problem is that lenders tend to look for the payslips and contract to match, with the day rate stated on the payslip rather than the breakdown to minimum wage and commission.”

Simon Butler says IR35 creates “further complexities” that some high street lenders are “not equipped to deal with”.

“Since April we have found that more people are overall concerned that these lenders will understand their working status even less, especially for those who have been contracting for themselves and moving inside of IR35 and now working through an umbrella.

“Essentially, mixing a history of self-employment via a limited company to the present day when monthly payslips are received,” says Butler.

But Hunter says some lenders are now accommodating to contractors switching from a limited company to an umbrella, “by flexing their lending criteria to facilitate umbrella arrangements, in recognition that these are still the same highly skilled mobile contractor clients as the ones who previously used their limited company contractor mortgage criteria”.

Hunter also notes some lenders, such as Skipton Building Society, do not differentiate between contractors operating through a limited company and those operating through an umbrella company, and will still use the contract day rate value to assess income.

And according to TSB, provided the applicant is on a day rate contract and income can be evidenced as per its standard policy for day rate contractors, they do not differentiate between how a business is set up.

A spokesperson for the bank says that any contracts provided to evidence income would need to show the name of the applicant personally, irrespective of whether there is an umbrella or limited company.

“There isn’t a one size fits all approach when considering contractors,” remarks Andrew Chalton, private client director at broker LDNfinance, which works with a large number of self-employed contractors mostly in the IT and financial services sectors.

“Therefore to our benefit we are able to lean upon our vast network of specialist lenders, which isn’t limited to your typical high street banks.

“As changes occur to taxation law, the requirement for a specialist broker becomes even more apparent as a fundamental tool to navigating an ever-changing and complex market.”

By Chloe Cheung

Source: FT Adviser

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

Marketing No Comments

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.”

To find out more about how we can assist you with your Contractor Mortgage please click here

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.

Marketing No Comments

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.

To find out more about how we can assist you with your Contractor Mortgage please click here

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.

Marketing No Comments

What is a contractor mortgage broker and do I need one?

A contractor mortgage broker is a financial adviser who specialises in offering self-employed individuals and contractors advice on securing a mortgage.

Choosing a contractor mortgage is a complicated process, and knowing what rate, term, lender, features and insurance to get are all time-consuming and complex matters.

Contractor mortgage brokers can therefore provide you with an invaluable service – navigating this arduous journey on your behalf and presenting you with only the best options to suit your situation.

Why use a contractor mortgage broker?

You may still be wondering why you really need a contractor mortgage broker and are tempted to cut out the middleman and go direct.

But if you aren’t sure on whether you need a contractor mortgage broker or not, here are just a few of the reasons why you should consider using one.

Experience – contractor mortgage brokers will have proven experience in securing mortgages for contractors. Having dealt with a plethora of contractors means they will understand your needs and are therefore more likely to be able to offer you better products and services. Going direct with banks and lenders that don’t understand your situation could mean you end up with a loan that doesn’t reflect your true borrowing potential; with an interest rate that penalises you just for being a contractor.

Specialist knowledge – with experience comes knowledge; your contractor mortgage broker will have a specialist knowledge of contractors. It’s likely that they will have worked with contractors who would otherwise struggle to get a mortgage, for example those with gaps in their contracts, adverse credit or those needing to consolidate debt. It’s also likely that they will have worked with those who are paid outside the norm such as doctors, sole traders, partnerships and limited companies. They will not be phased when you present them with your situation and will know exactly how to advise you.

Protection – when you receive mortgage advice your contractor mortgage broker has a duty of care to you. They are required to recommend a suitable mortgage and should be able to justify why the chosen mortgage is suitable for you. If their advice turns out to be no good, you can complain and get compensated. You may not have as much legal recourse if you go directly to a high street mortgage lender.

To find out more about how we can assist you with your Contractor Mortgage please click here

What should I look for in a contractor mortgage broker?

If you have decided that you need a contractor mortgage broker, there are a few things to look out for when deciding who will help you on your journey to securing your home loan.

Reliability – you will need to look for a contractor mortgage broker that will be there with you from your first phone call to the day you get your keys. Find out if you will be assigned a specialist consultant or case manager to be on hand with advice and support. This kind of service makes the process as easy as possible for you.

Dedication – does the contractor mortgage broker you are considering work with a comprehensive range of high street lenders and building societies? You should ensure that your broker isn’t just choosing a lender because it’s the easiest route, or because they get a higher fee from them. You need to choose a broker that will go through all of their lenders to find the one that is right for you and your situation.

Success rate – the industry average success rate for a contractor mortgage is 71%, therefore you should seek out a contractor mortgage broker with a success rate of at least this, if not more. It goes without saying that the higher the success rate the better as it proves their track record with those in a similar situation to you.

Best fees – consider what fee the contractor mortgage broker is charging and what you are receiving for the fee. Do you only pay the fee if the broker secures your mortgage? Some will refund you the money if they do not get you a mortgage. If they aren’t charging a fee at all that’s not necessarily a good thing – it means they will be receiving a fee from the lender. They could be picking a lender based on how much money they can get from them, rather than what’s best for you, possibly resulting in higher rates or a decline for you. They might also not be a specialist who understands your needs, or they might not be willing to put the work in if your case is not straight forward.

Customer service – is your contractor mortgage broker known for their impeccable customer service? Good customer service goes a long way in easing the stress of getting a home loan, and also in ensuring that you understand every step of the process. You can check out potential brokers on review sites like Feefo or Trustpilot to see what their reputation is like, or speak to other contractors on the ContractorUK forum to find out what experiences they may have had with them.

Final considerations

Getting a contractor mortgage can be a minefield without the assistance of a contractor mortgage broker to streamline the whole process for you.

Making the wrong choice about your contractor mortgage can cost you hundreds, even thousands of pounds, and it’s easy to get tripped up with all the mortgages awash with extra fees and charges.

So if the additional cost of using a broker is holding you back – keep in mind that paying their fee could actually save you a small fortune.

Not only this, but a contractor mortgage broker will ensure that your mortgage application is processed smoothly and efficiently, alleviating any unnecessary stress associated with moving home.

Source: Contractor UK

For more information on getting a contractor mortgage click here.