According to Chris Sykes, an associate director and mortgage consultant at Private Finance, 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.
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, proposition director, mortgages and later life at Sesame Bankhall Group, 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, managing director of broker Super Contractors, 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.
