Umbrella Contractor Mortgage
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Mark Notley answers your frequently Googled questions on umbrella contractor mortgages.
What is an umbrella contractor mortgage and how do they work?
‘Umbrella’ refers to a way that a contractor is paid. They open up a limited company and invoice the people they’re working for through the company. Through the umbrella scheme they pay tax at the basic rate.
The annual tax calculations will show a lower income than the invoices because of the basic rate tax payment. It’s a way of being more tax efficient.
From a mortgage point of view, some lenders will accept this, while other lenders won’t. Certain lenders will just class these people as self-employed. Some lenders will take the value of your invoices as your income – which is a higher figure than the value of your self-employed proof of income through HMRC.
For an umbrella contractor, the contractor part is who you’re employed by, the umbrella part is how you’re paid. From a mortgage perspective it works the same as any other contractor mortgage. It’s down to the lender whether they will accept your contracting structure and income.
Why do contractors use umbrella companies?
It’s more tax efficient and it gives them more flexibility. The contractors are basically self-employed but pay a basic rate of tax on their invoice earnings.
What criteria do I need to meet for an umbrella contractor mortgage?
It’s the same as any other contractor mortgage. The lenders are going to look at whether you’ve got experience in your trade. They will want to see your CV and consider you on a case-by-case basis.
It’s going to depend on how much you’re borrowing and what percentage you’re borrowing at. The best way to manage this is to talk to a broker. Give us your contracts and proof of income, so we can see how you’re paid through the umbrella company, and we will come back to you with options.
How much can I borrow?
It will depend on your earnings. If you earn over £500 a day then some mortgage companies will lend you up to 90% Loan to Value. If you earn less, they may lend you less. It will be a case-by-case basis.
If you present all your information to a broker we will calculate the affordability and tell you very quickly the maximum loan that you can borrow.
How do I prove my income for an umbrella contractor mortgage?
I would recommend you obtain copies of your current and recent contracts as proof of your self employment. You will need documentation of the net profit at the end of the year – either your full accounts or your tax calculation and tax year overview.
You may also need your contract history. Sometimes people go through a period where they are highly paid and that pay subsequently drops. Lenders often look at income from the last year and the year before. If this year’s income is suddenly a lot higher, they may take an average because they’ll be worried about the risk. So gather all your proof of income, give it to your broker and let them have a look at it.
What’s the difference between an umbrella contractor mortgage and a limited company mortgage?
There’s little difference between them – they are almost intertwined. A person can open up a limited company and pay their income into it. An umbrella organisation is basically a structure for salary payout where income is removed to cover expenses, administration costs, etc. and you pay basic rate tax on the amount that you earn.
You can have a limited company and get a mortgage. You can have an umbrella company – you just need to present that information to your broker and let us come back with options.
What are the benefits of an umbrella contractor mortgage?
Having an umbrella company is more tax efficient – you pay less tax and increase your net income. On the other hand, a lot of lenders won’t accept someone paid through an umbrella organisation. It’s sometimes more difficult to understand. In one respect, you’re getting more income, but on the other hand mortgage companies, credit card and loan providers may not lend to you. So there are benefits, but also some negatives to consider.
How do I apply for an umbrella contractor mortgage?
Approach a broker, because this is a specialised mortgage. Quite a few lenders don’t deal with it at all. Those that do, deal with it on a very specific basis – looking at it case by case.
A broker like ourselves at Total Home Loans won’t require any upfront monies from you to assess your application. We’ll come back with the options – our experience and help will be paramount in finding you a suitable deal.
Anything else we need to know on umbrella contractor mortgages?
Don’t be worried. The more information you give your broker the better. If you’ve taken the option of being more tax efficient then certainly a mortgage is available to you – just make sure you go to the right broker to help you find the most appropriate loan.
Your property may be repossessed if you do not keep up repayments on your mortgage.