Umbrella Contractor Mortgages

What is an umbrella contractor mortgage and how do they work?

If you’re self-employed, a lot of people will suggest you get a self-employed mortgage, and if you’re an umbrella contractor, they’ll say you should get an umbrella contractor mortgage. But these aren’t specific products, they effectively just come with different criteria.

An umbrella contractor mortgage is designed for contractors or freelancers who are employed via an umbrella company, rather than having a permanent salaried position.

Contractors tend to have more non-traditional income patterns, which can be a little bit more complex than your standard PAYE set up. Because of that difference, lenders will calculate income based on your daily or hourly contract rate rather than using a traditional pay slip.

Criteria is going to vary from lender to lender, but other than the complexities around income, the mortgage product and the process is pretty similar to a conventional mortgage application.

Why do contractors use umbrella companies?

The main purpose is to simplify financial administration. Umbrella companies deal with tax affairs, and usually pass down employment benefits you wouldn’t necessarily get by setting up a limited company in your own right. Payroll processing will also be dealt with by them.

You’re going to have a reduced amount of paperwork to deal with as a professional – they take that load off for you. Tax and national insurance and filing will be controlled by them. They might well provide you with things like professional insurance within the package.

It’s generally going to make the transition easier for a contractor between different contracts, making it simpler for you to jump between roles and be more flexible as a professional.

What criteria do I need to meet for a mortgage as an umbrella contractor?

The key criteria for lenders assessing an umbrella company contractor is different from the standard approach. They’re going to look at things like your contract length, whether that’s 6 months, 12 months or longer. They also look at your track record in contracting and how long you have been doing this.

Continuous employment is important – they will look for gaps between your contracts. The IR35 status is also a factor when looking at a contractor, but generally speaking, umbrella companies will be compliant because that’s one of their main purposes.

How much can I borrow as an umbrella contractor?

Everyone wants to know how much they can borrow, but the answer is vague and ambiguous because it will be different for everyone. Every lender will arrive at a different figure, on a case-by-case basis.

For a contractor, lenders might assess your income as your day rate multiplied by five days in a week, and then 52 weeks in a year. That’s going to give them an annual figure to put into the affordability calculator.

Let’s say your rate for a contract is £200 a day. That’s £1,000 a week and £52,000 a year. So £52,000 goes into the calculator, and the lender applies a multiple to that income plus any other income from a joint borrower or elsewhere. That multiple is going to be somewhere between four and six, depending on the lender.

The calculation is going to spit out a gross figure – the maximum borrowing amount. That will then be reduced by things in the background – your loans, credit cards, children, age and the size of your deposit. All of those things have a bearing on the maximum loan you’re left with – and every lender will be completely different.

How do I prove my income for a mortgage as an umbrella contractor?

You will need various documents to prove your income. You will usually be asked for your umbrella company PAYE pay slips, a copy of the current contract, your bank statements, your P60 and potentially your self-assessment tax returns.

In the worst case scenario, lenders might ask for an employment verification letter. It’s probably not going to require all those things, but it could be a combination of them.

What’s the difference between umbrella and limited company mortgages or getting a mortgage as an umbrella contractor and a limited company director?

I’m assuming this is asked by someone trying to decide between the two, and thinking about whether it’s going to shoot them in the foot when it comes to a mortgage.

As a contractor via an umbrella company, you’re effectively looked at as an employee of the umbrella company, as they handle payroll, taxes and deductions on your behalf. A limited company director operates their own business and usually takes income through a combination of salary and dividends from their business profits.

The documents you’re asked for will be quite different between both setups. For the packaging, underwriting and the actual process, it’s more straightforward for an umbrella company than a limited company director. Realistically, you’re not running a whole business entity – a lot of the work is predominantly dealt with by the umbrella company, so it’s easier from a mortgage perspective.

What are the benefits of getting a mortgage as an umbrella contractor?

Being paid through a PAYE system makes things easier to assess and easier to evidence. Because of that, the timeline for approval is likely to be much quicker.

With people that run their own limited companies, the challenge is getting that documented evidence. We tend to have to wait for that annual accounts submission or a personal income submission. That’s all done regularly for you through an umbrella company, and it’s easy to evidence.

From an employment perspective, an umbrella company is quite flexible and gives you the autonomy to hop between different contracts, without having to set up different companies or switch how you’re employed. As I mentioned previously, an umbrella company is likely to be IR35 compliant, which is a key factor for contractors.

Overall, it can be quite beneficial from a mortgage perspective compared to other contractors or self-employed applicants. But I wouldn’t use the mortgage as a deciding factor as to whether or not you should go to an umbrella company. It’s a case of looking at the other benefits to choose one route or the other.

How do I apply for a mortgage as an umbrella contractor? What’s the process?

You pick up the phone and call Henchurch Lane. It’s really important to seek expert advice with any type of employment outside of PAYE or sole trader. Most brokers are going to know that generic stuff, but few will know the various set-ups and scenarios for contractors and the quirks that come with those.

Very few will have done enough legwork for umbrella company applicants to know where to place that business. If you were to walk into a corporate estate agency, 99 times out of 100 they’re dealing with employed, non-complex cases. If you’re only exposed to these cases once in a blue moon, you’re not really going to know where to place it.

So make sure you’re doing your due diligence when you’re looking for a broker. Check they’ve got experience in that field. It’s quite easy to find people that specialise in specific areas of employment rather than a generic broker who deals with high numbers of ‘vanilla’ cases.

What else do we need to know about umbrella contractor mortgages?

A lot of these contractor questions will duplicate or cross over to the other contractor podcast we’ve done. And by all means, look at our limited company podcast or other self-employed content we’ve done. They’re probably going to be helpful.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.