However, those adding to the ranks of contract professionals will find that life is not as straightforward when it comes to getting a mortgage. Contractors are remunerated differently from those employed, usually paid a day rate via a limited or umbrella company on a fixed-term contract. This requires a specialist contractor mortgage, which is not available from high-street lenders.
Lenders who offer contractor mortgages have different rules around minimum contract length, contract gaps, and income. Still, all assess income based on a day rate rather than salary and dividends, which is usually the self-employed case. Generally speaking, if payment is considered on pay and bonuses, the borrower tends to end up with a lower mortgage amount than the day rate model. Even among those lenders prepared to use a day rate model, some are more generous than others in terms of the number of working days in the year. They will multiply the day rate by working out the contractor’s annual income. This significantly impacts the size of the mortgage a contractor can get, which is why it is so important to seek advice.
With IR35 rule changes coming across the private sector in April (delayed for a year because of the pandemic), which will impact contractors, the need to take advice is more crucial than ever. Businesses will be responsible for determining whether contractors who provide them with personal services fall inside or outside of IR35; if inside, then PAYE tax and national insurance contributions may need to be deducted upfront, which will significantly impact a contractor’s income.
A whole-of-market broker such as AWS Financial Services has plenty of experience helping contractors find the right mortgage for them. We know which specialist lenders to approach to get the most attractive terms. With lenders restricting maximum loan-to-values and tightening criteria, do get in touch for more information.