Using Umbrella Payslips to Get a Worthwhile Mortgage
Last Updated: 03-12-2021
Reading Time: 10 minutes
There was a time when contractors chose Limited Company payment structures over umbrella companies. That's because, working through a PSC, contractors retained more of their income than through an umbrella.
Even after paying an accountant, PSCs still made — and continue to make — financial sense. That is: from an income retention perspective.
And, yes: the difference in income persuades many contractors to overlook the risk of IR35's wrath.
Behind the scenes, we've also worked with many lenders to help them understand Limited Company day-rate contract income. So much so that our clients expect their application to breeze through the appraisal process.
Now, with another helpful nudge, many lenders are considering umbrella payslips, too.
So, up to a point: all good in the 'hood.
But, in our article today, I focus on the unforeseen struggles contractors who switch to an umbrella company face with mortgage lenders. It's an addendum to our recent post on ContractorUK, Why your umbrella payslip influences your mortgage application.
As ever, enjoy, comment, feedback to us. We're only too happy to help:
Table of Contents
- Why umbrella companies have become the go-to model for contractors;
- Hang on. I've got a payslip! Isn't that a good thing?;
- Mortgage underwriters are moving with the times;
Why umbrella companies have become the go-to model for contractors
Over the last two years, since the pandemic began and IR35 changed for good, contractors' outlooks have changed.
Of the contractor workforce prior to IR35 changes, approximately:
- one third of contractors now work through an umbrella;
- another third maintain their PSC;
- the final third has returned to PAYE employment direct.
Of the three 'structures', umbrella companies are fast becoming le choix du jour for many ex-Limited Company contractors.
There are many reasons for this change in tack, the main ones being:
- Many agencies now align themselves (rightly or wrongly) with umbrella companies;
- HMRC wiped out any lingering benefit from travel and subsistence tax relief;
- 'On-payroll' came into effect for the public sector, a vital source of work for many contractors and the self-employed;
- Changes to IR35 in April 2021 — namely the private sector also shifting to 'on-payroll' — 'killed the pig', as my father-in-law would have said, and
- Many firms have (technically) put a blanket ban on hiring independent professionals direct.
In short, working through an umbrella company, there's often:
- far less hassle,
- reduced risk (IR35 and continuity of work), and
- broader client potential.
The recent swing of contractors shifting from PSC to umbrella contracting suggests this trend is no fad.
But, umbrella 'employees' face another downside in making this switch (besides retaining less of their income). Based on an umbrella 'payslip', their mortgage borrowing potential is greatly reduced.
Hang on. I've got a payslip! Isn't that a good thing?
Contractors know from experience that in-branch advisors struggle to work out mortgage affordability using contract day rates. That scenario is unlikely to change any time soon.
Limited company contractors' retained profits, short-term contracts, minimal salary and dividend drawings? Rather than prove your affordability, these elements flag up 'high risk' in an untrained advisor's mind.
On that basis, umbrella contractors might think they'll get further now that they have payslips.
Makes sense, right?
If you were a permie and presented your last three months' payslips, advisors would have no problem working out your affordability. So, surely that extends to umbrella payslips, too, right?
Too much information!
Have you looked at your payslip, recently? Be honest with yourself: how closely does it mirror your old PAYE payslip? Not much, I'd imagine.
The average umbrella contractor payslip may show any or all of these credits and deductions:
- basic salary;
- holiday pay;
- additional pay;
- bonuses and/or commission;
- Employee National Insurance;
- Employer National Insurance;
- Umbrella company fee;
- protection insurance.
These are diverse categories compared to a traditional PAYE payslip.
Now, imagine an in-branch advisor trying to fathom why you pay two lots of NICs, employees and employers.
Your commission, bonuses, 'fees' and maybe even insurances proliferate your payslip. These 'extras' only serve to bamboozle your advisor further.
This is why most lenders leave specialist income structures to their bespoke underwriting teams.
The upshot of going direct? You leave the meeting with your mortgage lender(s) dejected.
Worse, you're now convinced you're no better off getting mortgage finance with your umbrella payslip than you were with your day rate contract.
Mortgage underwriters are moving with the times
The truth is, nothing is further from the truth. Or shouldn't be if you use the correct channels.
Underwriters have identified the shift in the contract workforce. Umbrella payslips are becoming the preferred way to assess contractors' income, where appropriate. Not that you'd know after a trip to the High Street or chat with a call centre agent.
So, the real question isn't, "Why can't I get a lender to understand my umbrella payslip?"
Rather, you should be asking, "How do I get hold of a sympathetic and understanding underwriter?"
Not on the High Street
The truth is, anyone dropping into a branch or talking to a call centre will only get as far as an advisor.
Bear in mind, most advisors at 'front of house' level deal predominantly with PAYE applicants.
They may also handle mortgages for straight up sole traders and other self-employed people.
For both of these type of applicants, lenders have specific — albeit somewhat inflexible — affordability templates.
These first line advisors may also vary in skill and responsibility. But, 9 times out of 10, they're the person responsible for assessing the risk of your application before sending the paperwork off to head office.
Then, once there, an underwriter will appraise the 'package'. At this point, what a contractor doesn't need is their in-branch/call centre advisor to have marked their application 'High Risk'. Such annotation will set the tone for the whole underwriting process.
So, this is the reality: if your advisor has tried to key you into their system using your payslip or SA302, you're in trouble. As an umbrella contractor, neither of those proof of income work in your favour.
You need to bypass that gatekeeper and appeal to an underwriter direct from the off.
Bang the drum: specialist income needs broker interpretation
I know. I've said it before, but it bears repeating. If your income and/or payment structure vary from the PAYE norm, you will 100% benefit from a proven specialist broker's help.
Also, if you've returned to direct employment from being a contractor, helping a new lender understand your past is paramount!
Chances are, the broker who helped you as a contractor can now help you make the mortgage switch as a permie.
I don't doubt that lenders will get better at understanding umbrella contractors.
Remember, many financial institutions who once hired independent contractors direct now only go through agencies. Those agencies will have new umbrella company contractors on their books.
But, if history is anything to go by, this triangle still won't do you any good. Here's why:
Restricted borrowing potential going direct
Many of the lenders who got on board with contractors before the changes to IR35 were 'intermediary only'. That meant they would — and do — only deal with contractors via a specialist broker who's 'means tested' or vetted them first.
And, of the public-amenable lenders, brokers still have to deal directly with a nominated underwriting team at head office. That's because (besides at bespoke specialist lenders), the level of acumen needed to assess specialist income, like umbrella payslips, is not instilled in all advisor staff.
I honestly can't see this public-facing stance changing any time soon. And remember: you only get one chance to make a first impression. Do yourself a favour: get a broker on board and make it a good one!
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on December 3rd, 2021 13:24pm in