Mortgages for Contractors and the Impact of IR35

If you are a contractor working across the IT, finance or construction industries, getting a mortgage during the pandemic has been trickier than ever. With contractors paid differently from employees, earning a day rate via a limited or umbrella company, not every lender properly understands how you are remunerated. Covid-19 means lenders have been looking more closely at income and expenditure, which means those with more flexible and fluctuating income are finding it harder to get the mortgage they need.

From 6 April, there is an added complication in the form of IR35 regulation, a tax change moving the tax liability for contractor status from the individual to the employer, designed to bring contractors’ pay into line with those who are employed. This is part of a move by the Treasury to eradicate what it believes is widespread tax avoidance from contractors working for a single company.

What does IR35 mean for contractor mortgages?

The new rules mean lenders may scrutinize your contracts and income more closely than ever. They may be concerned that if tax is not properly accounted for, you could find yourself in a position where it will need to be paid back, impacting your ability to pay your mortgage.

What specialist contractor mortgages are there? Many high-street lenders do not properly understand contractor remuneration. Instead, they treat borrowers as self-employed, taking salary and dividends from the past two years’ accounts. This may not be a fair reflection of your income, particularly if you have retained profits in your business and/or have been contracting for less than two years.

However, there are lenders who offer specialist contractor mortgages. These multiply your day rate by the number of working days in the year to work out your annual income. This is where you need to watch out as lenders vary considerably in the number of weeks they are prepared to use, with some taking as few as 36 weeks, while others will take as many as 48 weeks’ income into account. This significantly impacts the size of mortgage you can get, which is why it is so important to seek advice when it comes to getting a contractor mortgage.

Seek advice – how AWS Private Finance can help

The IR35 regulation changes make it more important than ever for contractors to seek mortgage advice from a whole-of-market broker such as AWS Private Finance. We understand the changes and know which lenders will treat you most sympathetically, as well as understanding what documentation they require. We have plenty of experience in arranging contractor mortgages and can guide you through the process, ensuring you are prepared properly so that there are no nasty surprises when it comes to applying for a contractor mortgage. Please get in touch for more information.
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