Umbrella Contractor Mortgage
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Umbrella Contractor Mortgage
Adam Messer talks to us about umbrella contractor mortgages.
What is an umbrella contractor mortgage? How do they work?
The first thing to say is that you don’t get a different mortgage as a contractor. It’s just about lenders’ criteria.
Some lenders are better than others for contractors. You end up with the same mortgage as anyone else, but some lenders will look at how your income is structured very differently to other lenders. Going to the right lender is key if you’re a contractor.
The most important thing is whether the lender looks at your income based on your contract, rather than your self-employment income.
Why do contractors use umbrella companies?
I’m not an accountant and we don’t give tax advice, but it all comes down to the way HMRC do things and certain rules they have. There’s a regulation called IR35, and if you’re an umbrella contractor looking for a mortgage you will be familiar with this.
The argument from HMRC is that some contractors are not really self-employed. If you’re contracting for a company that treats you like an employee, you’re not paying as much tax as an employee would. You also don’t get looked after in the same way with sick pay and holiday pay.
So they came up with this legislation which makes things more difficult for contractors, and so they started using umbrella companies. The client company that wants the contractor pays an umbrella company their daily rate, and then the umbrella company pays you as the contractor.
That could be done in a few different ways. You might be employed and they take the tax from your pay, or you might still be self-employed within that. It just adds another layer to fit within HMRC regulations.
What criteria do I need to meet for a mortgage if I’ve got an umbrella company?
It depends on your circumstances and the lender we go to. It’s really important to go to the right lender, because they look at things differently. Some will treat you as employed, some as self-employed. Others are going to look at the value of your contract.
Some lenders are better with umbrellas than others, and will use the value of the contract that you get paid by the umbrella company.
You will usually have your main contract and you’ll get some sort of pay statement or pay slip from your umbrella company. Then it’s really about timing – how long have you been doing this job, and how long is left on the contract?
If you’ve been doing this a long time or you’ve got a long time left on the contract, it’s going to be fine. There are lots of lenders we could go to. If you’ve only just started doing this it’s more tricky to find a lender.
If you’ve been doing it six months and you’ve got six months left on your contract, that’s also fine. But there’s not one set of criteria – some lenders are more flexible than others.
How much can I borrow as an umbrella company contractor?
It’s a big question and we could talk all day about how much you could borrow.
It comes back to different lenders using different income. Some lenders use the gross value of the contract – what you get from the umbrella company as your day rate or weekly rate.
If you earn over a certain amount of money, again it depends on the lender, but perhaps £75,000 grand, you might be able to borrow five times your income or more.
You could be on a hefty day rate, worked out over probably 46 weeks for the year – to allow for holidays and breaks. That’s potentially a big number.
But if we get the lender choice wrong, then we might end up with someone that might treat you more as self-employed and look at different numbers. So again, it comes down to choosing the right lender and picking the one that’s going to be the right for you.
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How do I prove my income for an umbrella contractor mortgage?
We usually need the current contract, and depending how long you’ve been on that contract, we might want the one before. Or, if it’s due to end, we might want the next one. Again, that depends on the lender.
We’re normally going to want recent bank statements to show the money coming in from the umbrella company, with matching pay statements from the company so that it all lines up.
Then we’re going to need personal bank statements and ID, but that’s the same for everyone.
What’s the difference between an umbrella company and a limited company with mortgages?
If you have a limited company, some lenders might treat you as a limited company director and look at your salary and your dividends. Often, that’s nowhere near as much as the gross value of your contract.
That’s the difference. Let’s say you earn £500 on your day rate – multiplied out by five days a week, 46 weeks in a year, you’ve got £115,000. Some lenders that will use that figure.
That money comes into your company, but you might not need to take all that out. You might only pay yourself £50,000 a year because you don’t want to go over the higher rate tax threshold.
There are some lenders that will just look at the £50,000, while others look at the £115,000. That’s the difference from a mortgage point of view.
What are the benefits of getting a mortgage as a contractor under an umbrella company?
It’s the affordability. If we go to the right lender, you might get five times your annual gross contract value. If that’s £115,000, you could borrow £575,000.
But if you’re assessed as a limited company director on a salary of £50,000, that borrowing could drop to £250,000. So there’s a massive difference – and that’s the benefit.
There are tax benefits for contractors as well as flexibility, but that’s not relevant to mortgages. Generally, there are lots of reasons why people might want to be a contractor.
In terms of downsides from a mortgage point of view, it’s the choice of lender. There are a handful of ‘go-to’ lenders for contractors – if you want to know who they are, get in touch.
The whole market isn’t going to look at your income in the same way and lend you what you want to borrow. That’s a downside. Job security is a factor, too, but again that’s not really mortgage related.
How do you apply for a mortgage as an umbrella contractor?
Just give me a call and I’ll do it for you. We know which lender to go to and we will get all the relevant paperwork. All we’ll need is some basic information.
We’ll find out who you are and what you do, and get the contracts and the evidence we need. Then we’ll go off to a lender and submit your basic details for an Agreement in Principle, which is the initial credit check. Then we finish off the mortgage application for you, and that’s that.
How can a mortgage broker help me with a mortgage as an umbrella contractor?
Most mortgage brokers will have a certain amount of knowledge on this type of income, and probably some more than others. We do these cases quite often and are experienced in looking at contracts and assessing the way to approach things.
It’s largely about lender choice and which lenders to go to, and that’s where your mortgage broker will come in.
The information contained within was correct at the time of publication but is subject to
change. 16.07.2024
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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