Can PAYE umbrella contractors get true contractor mortgages?

Recent updates to IR35 have forced many limited company contractors to turn to umbrella contracting. Some have even abandoned their independence altogether and returned to direct employment.

The main reason for this exodus is the updated IR35 legislation that came into force in April 2021. Now, many private and public sector clients use ‘on payroll’ by default to mitigate their tax liabilities (and responsibilities) to HMRC.

Other contractors have decided to weather the storm and retain their limited company payment structure. Which of the two ways of working is right for you will depend on many factors. Some will be down to personal choice; others will be beyond your control:

• COVID-19, its successors and their impact on your chosen industry,
  • e.g. remote working, industry longevity/risk, etc.;
• logistics of carrying out your contract;
• your current and future financial commitments.

Our job today is to identify how all this affects your chances of getting a mortgage.

Table of Contents:

• Why is On- or Off-Payroll such a big deal?
• Are there big differences between independent and umbrella contractors?
  • Umbrella vs independent contractor;
  • Umbrella employee vs PAYE employee;
• Different lender criteria; different contractor concerns:
  • Why can’t my lender understand my umbrella payslips/income?
  • Why is my lender suddenly asking for an SA302?
  • What has the industry I work in got to do with my mortgage affordability?
  • Am I better reverting to a limited company to get a mortgage?
• Umbrella contractor/employee mortgage options
• Risk: the reality of the new normal

Why is On- or Off-Payroll such a big deal?

We can argue the rights and wrongs of clients’ stance (and the HMRC ruling) on On/Off-Payroll all day. But, it will change nothing; organisations with more clout than us have tried (and tried) and failed to turn that ship around.

The upshot is, PAYE and SA302s are realities of everyday contracting that look here to stay. As a longstanding contractor mortgage broker, it would be folly of us to sweep these changes under the carpet.

So, let me take this opportunity to reassure our previous, new, and potential contractor clients: don’t get nervous! No matter how you now work—limited company, umbrella or even PAYE employee—we can still get you a mortgage that reflects your income.

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Are there big differences between independent and umbrella contractors?

The key thing is to note how umbrella contractors and independent contractors differ from (or assimilate) each other. Next, how do umbrella ’employees’ (as contractors working thus technically are) differ from traditional PAYE employees?

Umbrella vs independent contractor

Both types of contractor:

• take on short term contracts (3-, 6- or 12 months), often through an agency;
• use limited company payment structures, although independents do much more admin^*;
• get payslips (but not traditional payslips);
• tend to charge day rates and submit weekly invoices.

All good. The real differences are the payment structure, admin and ‘take home’.

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Umbrella employee vs PAYE employee

Next, we have to understand that an umbrella employee is not a traditional employee. Certainly not in an in-branch mortgage advisor’s eyes.

Yes, both umbrella and PAYE employees get payslips. But it’s doubtful a generic mortgage advisor will understand umbrella payslips^**. In truth, using them as evidence for a High Street lender could do your mortgage aspirations more harm than good.

You may even convince yourself that you stand a better chance of getting a mortgage as an ’employee’. Don’t go there. You work as an umbrella company employee, but you still fall into the specialist borrower niche.

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Different lender criteria; different contractor concerns

Due to the changes in the contractor labour market, our clients’ questions have changed since we first published this article. No longer is the debate about the semantics that differentiate umbrella contactor and umbrella employee.

Rather, the discussion has turned towards evidencing contractor mortgage affordability. And rightly so, it seems; here are a few concerns raised in client enquiries:

• Why can’t my lender understand my umbrella payslips/income?
• Why is my lender suddenly asking for an SA302?
• What has the industry I work in got to do with my mortgage affordability?
• Am I better reverting to a limited company to get a mortgage?

Well, let’s address those topical questions, shall we?

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Why can’t my lender understand my umbrella payslips/income?

Due to their concerns over IR35, many contractors have opted to work through an umbrella company. Chances are, a contract rate through an umbrella will lead to less ‘pick up’ than through a traditional limited company structure. But, the problems don’t end there.

^**The way umbrella companies show deductions on payslips can differ from one company to the next. And, in almost all instances, an umbrella payslip will show more deductions than a traditional employee’s PAYE payslip.

Accrued holiday pay, pension contributions, commission (if relevant), umbrella fees and NICs on an umbrella payslip can skew an advisor’s view of your income. As a result, they’ll discount all deductions and use your ‘pick up’ as the sole determiner for your mortgage affordability.

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Why is my lender suddenly asking for an SA302?

The main reason we’ve pushed for bespoke contractor lending criteria for so long is to demonstrate contractors’ true mortgage affordability. By far the best way to show this is by gross contract/day rate.

Up until early 2020, a copy of your contract and three months’ bank statements has satisfied this criterion. But, since coming out of the first lockdown in 2020, evidencing contract income has changed with many lenders.

It all boils down to risk, again. What income have you declared to HMRC for the latest financial year? Like P60s for employees, this is the bottom line figure advisors will use at High Street branch/call centre level.

If you do your own accounts or work through an umbrella, you’ll have your SA302 or equivalent to hand. If you use an accountant, you may have to ask them to procure your latest SA302 from the taxman.

What gets me every time is that this running around achieves little, and is totally unnecessary. You can (often) avoid this fool’s errand by using a broker who has relationships with lenders beyond branch level.

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What has the industry I work in got to do with my mortgage affordability?

Both the industry in which you work and/or your skill level could affect what a lender offers you. This could impact upon the loan amount or the interest rate they’re prepared to offer.

If your skills are in high demand in a flourishing industry, great. That’s what lenders are looking for. But, it’s safe to say, some industries have struggled more than others in our ‘new normal’.

If you work in retail or hospitality, you don’t need reminding how tough the last 18 months have been. But you’re good, right? Furlough or erratic work hours/income incurred hasn’t affected your credit score directly, right?

That might be true. But lenders are using those gaps in/reduced income to work out your ‘risk’ as a borrower.

Also, the higher a skill level, the less dispensable a worker is (generally) to a company. The opposite is true of those in less skilled roles, like admin, fork lift truck drivers, order pickers, etc. So, if your role isn’t one of those more highly skilled, a lender might also see this as higher risk.

Their offer may reflect these new levels of risk, even if your credit rating is beyond reproach.

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Am I better reverting to a limited company to get a mortgage?

I’m reticent to answer this. Firstly, much depends on how flexible your contract/client is. Next, how much you earn and then expect to gain are major factors. Plus, there’s the additional burden of actually running your business and keeping outside IR35.

Most contractors would take home more through a PSC than through an umbrella. But there’s a trade off, including^*:

• admin of your limited company;
• providing and paying for your own insurances;
• sick and holiday pay: all will come out of your own pocket;
• continuation of contracts if you work outside an agency;
• paying an accountant;
• potential greater risk of falling inside IR35.

I guess, the bottom line is a lifestyle choice. How much more do you expect to borrow for your mortgage versus how much extra work are you prepared to take on yourself running your limited company?

Whatever your answer, you first need to talk to a financial advisor/accountant to discuss your options. Start with how much more income you’re likely to keep if you forego your umbrella and run from there. It’s not a black and white decision, and you need to give the question real thought.

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Umbrella contractor/employee mortgage options

We can still get competitive mortgages for umbrella contractors/employees. As with independent contractors, we use contract-based underwriting to determine affordability.

That means we’ll use your gross contract rate to work out how much you can afford to borrow. For reasons already stated, we won’t use post-deduction payslips.

Brokers who understand contracting are umbrella contractors’ best hope of getting competitive mortgages that reflect their earnings potential. That fact hasn’t changed, nor is it likely to any time soon.

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Applicant risk: the reality of the new normal

When an underwriter receives an application, their immediate concern is ‘risk’. They must be certain that the applicant can repay the loan they want to borrow. To that end, we’ll package your application to reduce exposure to risk.

That doesn’t mean we’ll cook the books, try to hide deductions or inflate affordability. No, we simply show what you’re really worth, what the underwriter needs to see based on preordained lending criteria. By removing the unnecessary, we help underwriters see the wood from the trees.

The majority of High Street lenders won’t be able to offer that service. They’ll send your payslip with your application to head office. They’ll then leave the underwriter to try to work out what you can afford. They, in turn, usually default to your SA302, which takes into account no retained profit whatsoever.

You deserve so much more. As an umbrella contractor, a mortgage broker who gets contracting is your best—and often only—bet.

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