Umbrella Contractor Mortgages
Welcome to our latest episode of The Mortgage Mum podcast. Sarah Tucker is back again and she is still talking about contractors!
There are many types of contractors to cover and today’s episode is going to be a really interesting one, because this isn’t a typical contractor, it’s an umbrella contractor.
What is an umbrella contractor mortgage and how do they work?
In the last few episodes we’ve talked about traditional contractors who contract out their work to different companies. They’re paid a day rate, and we explained how lenders calculate their affordability based on that. Essentially they are self-employed contractors.
An umbrella contractor is someone that uses a company or an agency, which will pay them a PAYE salary as if they are employed.
That’s probably a benefit to the contractor. It gives them a little bit more security. And for those people that don’t want to submit accounts and have that extra responsibility, it’s obviously a good idea.
But when it comes to a mortgage, an umbrella contractor mortgage is very different in how we look at your income.
Why do contractors use umbrella companies?
It’s probably for ease. How they pay tax is simpler, because they payas they earn, like other people that are employed.National insurance contributions and taxes are automatically deducted much like on a normal pay slip.
So umbrella contractors haven’t got to manage tax returns and do their self-employed accounts at the end of the year. They’ve also got less admin on their plate, because the umbrella company handles all their invoicing.
They don’t need to worry about chasing payments and generating invoices and managing it all, which is a job in itself. If you haven’t got somebody that can do that for you, the hours you spend doing your admin are hours you could be earning your day rate somewhere else.
Those are probably the main drivers. Obviously any contractors listening that are potentially wondering whether to work with an umbrella company may have other reasons to look into it.
What criteria do I need to meet for an umbrella contractor mortgage?
You need to be being paid by the umbrella company. I’ve been looking at the lenders’ criteria this morning, and it’s quite fascinating how much it differs.
You need to show you’re employed by the umbrella company, and lenders like to see at least 12 months of contracting history. The amount of time you need to have been under the umbrella company varies between each lender.
Otherwise they’re much like a normal contractor mortgage. Lenders look to see if you’ve had any gaps in your contracts. They ask how long you have been in this particular line of work. How long have you got left on your contract? Have you got anything in place if you have less than three months to go?
They also make sure the umbrella company is reputable and complies with tax regulations. So if this is something you’re considering, just make sure you’re using a company that you’ve been recommended to, that has good reviews and that you feel safe to use.
As with any mortgage, your credit history and credit score are really important. How much deposit you have matters too and, of course, affordability. So we’ll be looking at your day rate and your pay slips to see that affordability and financial stability. That’s our job.
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How much can I borrow as an umbrella contractor?
It’s a good question – we’re going to need to take a bit of time to explain it in this episode.
You may think that because you’re under an umbrella company, you’re PAYE employed. So you just multiply the gross amount on your payslip by 12 and that’s your income. But that’s not how it works.
You aren’t treated as a traditional employed person, you are still self-employed under an umbrella contract. It’s still worked out on your pay rate. You might be being paid hourly, daily or weekly.
There’s a threshold I’ve noticed across the lenders, where if you earn £75,000 or more, they’re going to calculate your income in the following way.
Let’s say you’re paid £50 an hour and you work eight hours a day, five days a week. They calculate that income for the week and then multiply it by 46 weeks. Like a normal contractor, they’re allowing up to six weeks’ holiday and gaps between your contracts. In that example, you would have an income for a mortgage application of £92,000 pounds.
If you earn less than £75,000, lenders use a different affordability calculator, and you would be classed as a standard self-employed applicant. They will look at your dividends and your pay slips.
In terms of what that means you can borrow, we always use a figure of 4.75 times your income – your joint income if you’re together on a mortgage application. It’s all about working backwards. You’ve got to know what your income is as a contractor before you can work out how much you can borrow.
As I always say, every lender lends a different amount, and they all treat umbrella contractors a different way. So it’s really important that you go to a broker and let them do the hard work for you. Let us find the lender that’s going to offer you the most based on your own specific circumstances.
How do I prove my income for an umbrella contractor mortgage?
It depends if the lender is going to treat you as self-employed or as a contractor. It comes down to that earnings threshold.
If you’re self-employed, we’re looking for your tax return, your SA302s. That’s the document that you submit to HMRC. We’re looking at how much income you’ve declared and how much tax you’ve paid to determine what you have earned.
We’ll also look at your last three months’ payslips from the umbrella company. These will include some costs. They may charge you an agency fee and they will have some national insurance deductions. Typically, a lender will take those off and won’t include them in your income. Then they’ll do that calculation on the weekly rate.
So in terms of your paperwork, it may be that we ask you for SA302s and accounts. We may need your last three months’ pay slips from the umbrella company – or both, but we’ll guide you through that. Your bank statements will always accompany those to make sure they marry up. They also show us more about your budget per month, so we can work with you on that, as well.
What’s the difference between umbrella and limited company mortgages?
Technically, you’re employed by the umbrella company, so they handle your payroll, tax and national insurance contributions. You are paid through PAYE, so you receive payslips, although your day rate is typically what lenders base your income on.
Mortgage lenders are going to look at your pay slips from the umbrella company, but they’ll still look at your day rate, contract length and your total income.
With a limited company, you are the director and an employee of your own business. You decide how much you want to pay yourself. You will need to manage your own tax.
For a mortgage, lenders assess you based on what you pay yourself and your dividends from that business. You might not pay yourself everything you earn, so that might not be an accurate reflection of your ability to afford a mortgage. Some lenders will take that into account and look at what you’ve actually earned as a contractor that year.
In essence, it’s how you’re structured, and how you prove your income and how you pay your tax that lenders are interested in.
What are the benefits of an umbrella contractor mortgage?
The main benefit of an umbrella contractor mortgage is just that you’re looked at as an individual. Your complete pay structure will be taken into account. Mortgage lenders are very experienced with dealing with that, and so although you fit into a specific pocket of the market, lenders view your individual contractor history and your specific ability to repay that mortgage.
You’re not treated in a negative way through working under an umbrella company. So if it’s right for you and it’s right for your family to structure your contractor business in that way, you’re not going to struggle to get a mortgage because of it. That’s a benefit.
Other benefits can be more personal. Everyone hates tax to some extent, but my husband, for example, would get very stressed if he had to fill in his tax return every year – even though he’s perfectly competent in all other areas. Very successful contractors can struggle with the administration of their accounts and their tax – even with the help of an accountant.
If you are someone like that, an umbrella company can relieve a lot of that stress and hassle and allow you to do what you do best.
How do I apply for a mortgage as an umbrella contractor?
You do need a broker, because how are you supposed to navigate this yourself? We have access to all the information.
I have an amazing team who really know what they’re talking about when it comes to contractor mortgages. And there are so many different variations of criteria around this particular pocket of the market.
I have all the search engines and the tech available to me to give me information quickly. If you don’t have this, or the training and knowledge, it would be pretty impossible. You’d just be relying on one source of information, potentially one bank. And criteria could vary massively in what they can give you on a mortgage.
So don’t limit yourself. Work with someone who looks at the entire market for you and ideally explains everything that’s happening. A broker will guide you through it step by step.
What else do we need to know about umbrella contractor mortgages?
It’s always worth reminding people that you can work with a mortgage broker for a long time before you need a mortgage. A lot of people think our job is very transactional, but it’s not.
People speak to us before they can afford a mortgage. Perhaps they are thinking about becoming a contractor and want to know what it would mean for them. How long would it be until they can move house, for example?
This is how we like to work at The Mortgage Mum. We love to be part of the journey – and it’s not linear. It’s going to go up and down. You’re going to have changes that you expect in your life, and some unexpected ones. So find a mortgage broker that’s going to be there through all of those things, who knows your family, knows your goals and is there for you when you want to pivot.
It’s a really personal relationship. Try and find someone you can build that rapport with. They’re out there. I certainly know 30 of them – my team – but there are others. I know many people that have worked with brokers for many years. It’s going to pay dividends later on.
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