Umbrella Contractor Mortgages
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Umbrella Contractor Mortgages
Richard Campo answers your questions on Umbrella Contractor Mortgages.
What is an umbrella contractor mortgage and how do they work?
This is all to do with something called IR35. If you’re a contractor you’ll be really familiar with that. It’s about your employment status – if you’re within IR35 you’re quite likely to go under this umbrella setup. If you’re outside IR35, you’re working on a day rate contract typically and you’re responsible for your own taxes.
How it works for someone inside IR35 is that the umbrella company is your payroll function. It means you will sit within that piece of regulation – you pay normal PAYE tax and get payslips. The umbrella company may also find you work and be a support network as well.
What are the criteria for an umbrella contractor mortgage?
From a mortgage perspective, you’re treated the same whether or not you’re in an umbrella company. What we would typically do is work on the contract value itself. There’s one distinction to draw here, which is that the value of your day rate impacts how much you can borrow.
With quite a lot of banks, if the day rate’s over £500 you can actually borrow more – even though in this setup you’re probably going to get monthly pay slips. Whether it’s the day rate for your contract or the monthly value, banks convert it back to the day rate.
Say, for example, you get £250 a day, banks will then multiply that by five to get a week’s pay, and then calculate that over a 46 week year. It means they would take your income as £57,500 a year. Most banks then offer you about five times that income as the loan amount which is around £290,000.
But if your day rate is over £500, banks tend to work on a 48 week year because you’re deemed to be more in demand. So if your contract value is £750 a day over a 48 week year, then your income is taken as £180,000. Plus, because also your income is above £100,000 some banks then offer you a five and a half time multiple. So you could borrow something like £990,000.
How do you prove your income for an umbrella contractor mortgage?
It depends on the situation, but we’d either want to see your payslips or the contract – and if we can see both we can work up the most favourable calculation. We’ll do the research and come back to you with all the options.
We need to see bank statements and your credit file because your outgoings are a big factor as well. Big childcare commitments or loans or anything like that will affect the overall affordability of your mortgage. We factor all that in to give you an accurate picture of how much you can borrow and what it will cost.
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What’s the difference between an umbrella and a limited company?
We’re talking here specifically about umbrella companies where you’re typically paying taxes under a PAYE set up. You won’t have a limited company.
If you are running things through a limited company, whether you’re a contractor or a limited company director, look at the other resources on our website.
What are the benefits of an umbrella contractor mortgage?
The main benefit is that banks will treat you more favourably than you think. Not all banks do this, so it will narrow down your choice of lender. Just because you fall into this area, it doesn’t mean you have to have a more expensive mortgage.
The way that lending has always worked is that you either fit a bank’s criteria or you don’t – even if you’re in a more niche or specialist area. Banks don’t decide to lend you a mortgage and load the rate by 1%. They just offer you whatever the pricing is at the time, as long as you meet the criteria. Many good high street banks do offer mortgages for this, but please be careful. It’s not always a great idea to go to a bank directly – if you go in with your payslips and say you’re a contractor, they will probably get very confused. Meanwhile a broker will know how to present this and get the mortgage approved for you.
How do I apply for this type of mortgage?
Again, because this is a bit more complicated, just speak to a broker really early in the process – ideally, before you’ve found a property. It’s really important that you understand exactly what you can borrow. You might have a really good idea of this, but in my experience most people don’t, and 9 times out of 10 people can borrow way more than they thought.
In terms of an actual application, talk to a broker, get an Agreement in Principle. Then you can find a property with fewer headaches.
If you’re remortgaging, we deal with that for you too. With interest rates looking to keep going up over the next few years, the best time to talk to us is about six months out from your current deal ending. We can book a rate going forward, so even if interest rates rise over the next six months we can actually secure your product now. That’s a big part of the business we’re doing right now, hedging our clients against future rate rises.
How can Rose Capital help me as an umbrella contractor?
There are two points to reiterate. First, using a broker is going to save you so much time and money. It’s not uncommon for our clients to be earning £500 or £1,000 pounds a day – so you don’t want to be sacrificing a day trotting down to a bank and then getting the wrong outcome. It’s an exhausting and painful process. However, there’s a really simple solution: talk to a broker. Let us do it all for you.
The other big benefit is that we get lots of exclusive rates and preferential treatment. We work in a world that’s distribution-led and we’re part of the largest mortgage network in the UK. We do something like £60 billion in lending every year across that network. Banks give us better products because we give them the right clients. It’s actually more cost-effective for them than having clients visiting a branch directly.
We also have preferential treatment in terms of underwriting. There are a few banks where we can talk to underwriters directly and get a deal tailored just for you.
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