How being inside IR35 affects your mortgage as a contractor
How being inside IR35 affects your mortgage as a contractor
Modern contractors flip-flop between roles as and when the need dictates. If you see a role ‘inside IR35‘, you’ll use an umbrella payroll. If it’s outside IR35, you’ll use a limited company. Heck, if the pay’s juicy enough, you’ll even go full-time PAYE between contracts.
We get that. And, after much (often painful) negotiation, most of our lenders do, too. So, today, we’re not going to bore you with 2,000 words of fluff. We just want to provide an overview of how being inside IR35 affects your mortgage affordability. Or not.
If you’re a contractor, you already know your IR35 status*
Many guides detailing the impact of IR35 on contractor mortgage affordability already exist. Our founder and CEO, John Yerou, has even written such a guide for Contractor UK. However, John’s aside, these other guides tend to go into way too much detail.
My guess is, as a contractor, you already know if you’re inside or outside IR35. You don’t want to scroll through a detailed IR35 guide to get to what you want to know.
But, for the sake of those who are unsure about their status, let’s keep the overview brief:
- If you work through an umbrella company, you’re probably inside IR35
- If your contract is with a client direct, you’re probably outside IR35*
- If you are employed and your employer deducts tax and NICs at source, you’re PAYE; IR35 has nothing to do with it
*Off-payroll rules
When off-payroll rules came into place, many large organisations pigeonholed their external workers “inside IR35”. In those instances, contractors servicing those contracts today do so via an umbrella company.
If your contract is with your client direct, it is outside IR35. That means you’ll be servicing that contract through a PSC (as an LTD contractor).
If you are unsure, check your contract. If that doesn’t specify, talk to your hirer or ask them to put you in touch with payroll. They’ll confirm your IR35 status for you either way.
Still, if you are desperate for a full IR35 guide, you can access one on our partners’ sites, Contractor UK or Qdos. It’s their bread and butter; both are proven experts in the field.
Generally, there’s little distinction between IR35 statuses
The bank of lenders offering contractor mortgage criteria has grown. However, the number of lenders with underwriters that truly grasp contracting is comparatively small.
Even then, each of those lenders has its unique appetite for risk. This appetite then informs all its mortgage lending criteria.
The unique affordability criteria applied to any contractor depend on that contractor’s payment structure. Some lenders assess each contractor mortgage application manually, on its merits. Others have established criteria for umbrella workers, CIS contractors, LTD contractors, locums, etcetera.
So, what does that mean for you? In a nutshell, there is no one-size-fits-all algorithm for contractors and the flexible workforce.
Access all the contractor-friendly lenders in one place
How can we be certain about this? We’re one of the only truly independent specialist contractor mortgage brokers operating today.
That means we have no limits on whose door we can knock. And, since 2004, we’ve knocked on many. This proactive approach has enabled us to build the largest network of contractor-specialist lenders online today.
And what does this mass of accrued knowledge tell us? Most lenders who’ve taken the time to listen don’t care about your IR35 status. So let’s just qualify that.
Lender priorities ahead of your IR35 status
Even if a lender distinguishes between in- and outside IR35, it would only really affect one thing. That’s the affordability calculation underwriters would use to work out how much you can borrow.
In general, lenders will work out your mortgage affordability as such:
- If you’re an umbrella contractor, 90% of lenders will work off your net pay†
- If you’re a limited company contractor, the lender will work off your gross day rate
†The exceptions that prove the rule
There are lenders that treat limited company contractors as self-employed, for example HSBC and Santander.
Conversely, there are three lenders who use an umbrella contractor’s day rate as the basis of their affordability calculations. Those three lenders are:
Regardless of the way you work, lenders may temper their standard contractor lending criteria if:
- You have little contracting/industry work experience, or
- Your credit score isn’t where a lender might like it to be
Contractors with limited work history
Some of our lenders require contractor applicants to have a minimum contracting history. Others take a more nuanced approach. They’ll take into account your work history as a PAYE employee as long as it’s in the industry you’re contracting in at the time of application.
There are even what’s called “Day-1” contractor mortgages. In theory, you can get a mortgage on the first day of your first contract.
To qualify, lenders want every aspect of your borrower profile to be perfect. This includes:
- A considered history in your industry, often with references
- A near-perfect credit score
- A sizeable deposit/equity in your home
- Evidence of future continuity in your role or the industry in which you’re working
Again, it’s unlikely that your IR35 status will have any impact on an underwriter’s decision for this type of mortgage.
Mortgages for contractors inside IR35 and with impaired credit
If you have a low credit score, that doesn’t necessarily mean you have bad credit. You may simply not have had enough time to establish a sufficient credit history.
But even if you’ve accrued one or two financial blips, we have lenders who specialise in bad credit mortgages. This is how an impaired credit history might affect a lender’s mortgage offer; they:
- Might offer you a reduced income multiplier
- Will ask you to find a bigger deposit, somewhere between 15% and 30%, depending on the credit issue’s severity and how recently it was registered††
- Will offer you an interest rate higher than their most competitive deals
††If your credit issue was for a small amount and occurred over three years ago, some of our specialist lenders may overlook it altogether. Conversely, if the issue is new and outstanding, you’ll find it harder to get a mortgage.
Working out your annualised income as an umbrella contractor
Here’s a quick way to work out roughly what a lender will use as an umbrella contractor’s ‘annualised’ income. Without fail, they will use between 85% and 88% of your day rate.
So, if you earned £200/day, they would use between £170/day and £176/day as their starting point. They would then enter that into their standard calculation.
Let’s assume your lender works on an annualisation calculation of [day rate × 5 (days/week) × 46 (weeks/year)]. Your annualised income for affordability purposes would thus be between £39,100 and £40,480.
Finally, the lender would apply their income multiplier to that amount. If we assume an income multiplier of × 5, the range equates to a borrowing ceiling of between £195,500 and £202,400 for an umbrella contractor earning £200/day.
Final steps: take action
Your day rate is a powerful tool. Even if you’re inside IR35, you’re probably taking home an equivocal amount to what a PAYE employee takes home in the same role.
Don’t forget, when a permie applies for a mortgage, lenders use their gross salary. It’s rarely different for contractors, even those inside IR35. So you’re at least on a level footing with your PAYE peers.
If you’re serious about getting a mortgage, get a copy of your credit report. So many people don’t, and it’s a crucial step. Our guide explains why: Why mortgage applicants should get a copy of their credit report.
Lastly, talk to our brokers. We believe in forming lasting partnerships with our customers. Once we’ve had a chat and understand your unique situation, we can move forward.
It’s essential that your mortgage aligns with your lifestyle and life goals. So many contractors jump at the first mortgage they’re offered, normally out of sheer relief. But a mortgage is more than that. It should work for you, not you for it.
We’re in constant contact with our contractor-friendly lenders. In most cases, we instinctively know which lender and mortgage is right for you after that first chat.
Our experience will save you so much legwork and secure you a competitive deal, regardless of your IR35 status. Let us show you how little it matters in the grand scheme of things. Pick up the phone or fill in the contact form to get the ball rolling. You’ll be so glad you did.
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