Yes, you can still apply for a mortgage even if you’re a contractor working within IR35. IR35 legislation, introduced by HMRC, aims to prevent contractors and freelancers from avoiding taxes by operating as limited companies. Contractors within IR35 typically have similar working arrangements to employees and may work through umbrella companies or join their client’s payroll.
Contracting within IR35 is common among various professions, including IT contractors, locum doctors, dentists, and other freelancers who work on short projects or assignments.
While being a contractor within IR35 may impact your mortgage application process, it’s still possible to secure a mortgage. Lenders will assess your income, stability, and financial situation to determine your eligibility. It’s advisable to work with mortgage advisors who understand the complexities of contracting within IR35 and can guide you through the application process.
At Strive Mortgages, we specialise in mortgages for contractors and those that work within the IR35 framework. If you are interested in understanding the impact of your contracting status on your mortgage options, please don’t hesitate to get in touch with us. One of our experienced team members will be more than happy to assist you.
What is the criteria?
The criteria for IR35 contractors can vary enormously among lenders, and some are more favourable towards this employment setup than others. Having a track record of employment as a contractor will generally work in your favour, with some lenders requiring a minimum of 2 years of contracting experience.
High-value contractors, such as those earning more than £500 per day or £75,000 per annum, often have more options available to them. Some lenders may only consider the gross value of one of your contracts, while others may take into account multiple contracts. Additionally, some lenders may treat you as self-employed and calculate affordability based on an average of your most recent few years of profit or company drawings.
How much can I borrow?
The amount you can borrow as a contractor will depend on several factors, including your deposit level, credit score, employment history, and the level of your income. Each lender’s criteria will vary considerably, and some may treat contractors more favourably than others.
For example, many lenders will classify contractors who pay their own taxes or have taxes deducted by an umbrella company as self-employed. They may take an average of the contractor’s last 2 or 3 years of self-employed income to determine affordability.
Alternatively, some lenders may base affordability on the contractor’s gross annualized day rate. For instance, if your day rate is £500 and you work 5 days a week, they might multiply your day rate by 5 and then by the weeks in a year, typically allowing for around 6 weeks of holiday. For example: £500 x 5 x 46 = £115,000. You may then be able to borrow around 4.5 – 5.5 times this amount in addition to your deposit.
This approach can often be more favourable than treating the contractor as self-employed, as many lenders tend to do.
It’s important to understand each lender’s specific criteria and shop around to find the best mortgage deal that suits your circumstances as a contractor.
Best Mortgages for IR35 contractors
The best lender for each applicant will depend on their individual circumstances, such as the level of deposit, credit score, contract length, and employment history. However, certain lenders are known for their generous approach to contractors. For instance, Bank of Ireland, NatWest, and Halifax are some examples of lenders that consider using the gross annual contract value.
It’s important to note that lender criteria can change over time, so it’s advisable to check with a mortgage broker who can provide up-to-date information and help you navigate the mortgage market effectively.
What interest rates are available for IR35 contractors?
There are typically no specific mortgage products or rates tailored specifically for contract workers. When we talk about “contractor mortgages,” we are referring to the lenders’ specific criteria and how they treat individuals in this sector. The interest rates offered to contractors are generally the same as those available to individuals in most other professions. However, contractors may have a smaller pool of lenders to choose from due to their employment contract type.
That being said, there are still plenty of reputable lenders in the marketplace who cater to contractors.
How can I check if I fall under IR35?
To check if you fall under IR35, you can follow these steps:
- Review Your Contract: Thoroughly examine your contract with the client or end-user. Pay attention to terms regarding your control over your work, your right to send a substitute, and any obligations to provide services personally.
- Consult HMRC Guidelines: HMRC provides guidelines on IR35 and employment status. While these guidelines can be somewhat vague, they offer insights into factors considered when determining IR35 status. Reviewing them can help you understand the criteria HMRC uses.
- Use HMRC’s Check Employment Status for Tax (CEST) Tool: HMRC offers the Check Employment Status for Tax (CEST) tool, an online tool designed to help individuals and businesses determine employment status for tax purposes. You can input details about your contract and working arrangements into the tool to receive an assessment. Keep in mind that the accuracy of the tool’s assessment may vary, and it’s advisable to seek additional advice if you’re unsure.
- Seek Professional Advice: Consulting with a tax advisor, accountant, or legal expert who specializes in IR35 can provide personalized advice tailored to your specific circumstances. They can review your contract and working arrangements in detail to assess your IR35 status accurately.
- Review Working Practices: Consider how you actually carry out your work on a day-to-day basis. Factors such as supervision, direction, and integration with the client’s team can influence your IR35 status. If your working practices resemble those of an employee, you may be more likely to fall under IR35.
- Stay Informed: Keep yourself updated on IR35 legislation, case law, and HMRC guidance. Changes in legislation or court rulings can affect IR35 status determinations, so staying informed is essential.
By following these steps and considering various factors, you can better determine whether you fall under IR35. If you’re uncertain or need clarification, seeking professional advice is recommended.
What documents will I need?
The documents required for a mortgage application as a contractor can vary among lenders and depending on your specific situation. However, you may be expected to provide the following:
- Contract Copies: Copies of your current contracts or agreements with clients, detailing the terms of your employment, including duration and payment terms.
- Proof of Income: Evidence of your income, which may include:
- Bank statements showing regular income deposits.
- Payslips or invoices from your contracting work.
- Tax returns, especially if you’re self-employed or operating through a limited company.
- Employment History: Details of your employment history, including any previous contracts or positions held.
- Identification: Valid identification documents, such as a passport or driver’s license, to verify your identity.
- Credit History: Information on your credit history, including credit reports and scores, to assess your creditworthiness.
- Proof of Address: Documents verifying your current address, such as utility bills or bank statements.
- Deposit Details: Information about your deposit, including its source and size.
- Accounts (if applicable): If you operate through a limited company, you may need to provide company accounts to demonstrate your financial position.
- Tax Returns (if applicable): If you’re self-employed, you may need to provide copies of your tax returns for the past few years.
How Strive can help
At Strive, we possess extensive experience and a wealth of knowledge in dealing with contractors. We maintain close working relationships with key lenders in this sector, positioning us as the best resource to assist you in finding the most suitable mortgage deal and enhancing your chances of success with your application.
If you are interested in understanding the impact of your contracting status on your mortgage options, please don’t hesitate to get in touch with us. One of our experienced team members will be more than happy to assist you.
Contact us today, and we’ll work hard on your behalf to find you a competitive mortgage.
For more information on mortgages for contractors, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.