What is an Umbrella Company Mortgage?
After leaving full-time employment, you first need to understand the financial nuances before entering the world of contracting and freelancing. For this, you must be bombarded with pieces of advice and suggestions from all over. The most obvious suggestion would be, “Find an umbrella company and understand the benefits of an umbrella company get a mortgage”.
Now, you must be thinking only about it.
- What is an umbrella company?
- How is it going to help me?
- Is it the best-suited option for me?
- What is an umbrella company mortgage?
- What are the advantages of an umbrella contractor mortgage?
The list of questions is endless. So, to quench your quest for knowledge about umbrella company mortgages, we bring step by step information for better understanding.
WHAT IS AN UMBRELLA COMPANY?
If you started as a sole trader or contractor, finding a good umbrella company for yourself is advisable. By doing so, the umbrella company employees will be taking care of all the accounting involved in the project. They will raise the invoices and pay you via PAYE. The payment you receive is the amount you get after deductions of taxes and National Insurance Contributions (NIC).
So, your worry about keeping account books updated is sorted. And you have proof of the income generated through projects and assignments done as an independent contractor working through an Umbrella Company or Ltd.
WHAT IS AN UMBRELLA COMPANY MORTGAGE?
As the name suggests, it is a mortgage for umbrella company workers that works primarily for those who work through an umbrella company. The umbrella company mortgage understands the values of income generated by a contractor. Thus, it helps in getting better mortgage terms and conditions.
Some big mortgage lenders do not entertain umbrella mortgage customers, as they feel the income is a bit complex to understand.
WHAT ARE THE BENEFITS OF UMBRELLA COMPANY CONTRACTOR MORTGAGE?
There are various benefits of using an umbrella company for contractor mortgages. Some of them include:
Evidence of regular income: One of the main advantages is regular income evidence. A person working as a contractor is not taken seriously by big lenders, as they find it challenging to understand earnings and calculate income. So, if you are working through an umbrella company, you get weekly or monthly payslips, which can be helpful for the lender to understand the income.
During the process of completing mortgage underwriting, you are always asked for evidence of your income. Being an umbrella contractor mortgages a company contractor, you do not have to wait for a year to update accounts books. This adds to your credits when any lender considers you as a mortgage customer.
New contractor preferred by the lender: for umbrella company contractors Being a newly self-employed person, you might be apprehensive before approaching lenders. But then some lenders will consider your application if you are working through an umbrella company. Being an umbrella company contractor allows you to apply for a mortgage just a few months into a contract.
Considering overall contract value: A self-employed person, who gets paid via Umbrella Company, saves himself from the scrutiny of payslips. Some specialist lenders are glad to consider the overall contract value. The contract has to be legally approved, and payments should be made consistently.
Borrowing more mortgage amounts: An umbrella company knows how to treat your gross income for the mortgage provider for your benefit. And if you manage your expenses well, you can show better net profit. This will help you in convincing lenders to allow you to borrow a larger mortgage amount.
WHAT IS THE NEED FOR THIS NOW?
After the closure of 2020, there have been changes to IR35. The updated IR35, as defined by the HMRC, is designed for self-employed, contractors and freelancers. It identifies contractors who are misappropriating taxes. So, make sure to operate ‘Inside’ of IR35 and pay legal taxes.
WHAT IS THE UMBRELLA COMPANY MORTGAGE ELIGIBILITY CRITERIA?
When a lender is ready to consider your application, he will be assessing you and your credit history and would want to get informed about a few essential things:
- Time spent as an umbrella company contractor. The lender prefers those who have at least 12 months of association.
- If your contract has been renewed with the umbrella company you are working with, there are better chances of approval.
- Working through multiple umbrella companies is good for earnings, but lenders are keen on considering those who work with one company.
- You should be above the age of 25 years. Although it is not mandatory, some lenders prefer this age limit.
- Having adverse-credit scores in your file is always a red flag for your lender. So be careful about it.
Which lenders offer these mortgages?
It is important to note that not all lenders provide mortgages for contractors working under umbrella companies. However, having a knowledgeable mortgage broker who understands this working arrangement can be highly beneficial. The criteria for lending to contractors can vary among lenders and mortgage providers. It would be helpful to consider several possibilities and discuss them with a mortgage broker to determine which lenders may be open to such applications.
Halifax offers umbrella company mortgages and determines income based on either the gross value of the contract or income derived from payslips/bank statements. The calculations are carried out using 46 working weeks per year.
Barclays has specific guidelines for assessing affordability when considering contractors’ taxable pay. They take into account the average of the last three months’ taxable pay, the minimum wage, excluding any holiday pay and pre-tax deductions made by the umbrella company (such as agency fees and employers NI). To be eligible, individuals must have a minimum of 12 months of contracting experience, with no more than a six-week gap between contracts within this period.
The Bank of Ireland has implemented a policy where income assessments will be based on the gross pay received from the work for an umbrella or company, rather than the original contract value.
Work out your maximum borrowing
When contractors use umbrella companies, determining their affordability can be challenging. Lenders often use varying calculations to assess borrowing capacity of umbrella contractors, making it difficult to determine the exact amount one can borrow.
When it comes to borrowing money, a general guideline is to limit it to around 4.5 times your annual salary. In some cases, you may be able to get a higher income multiple, such as 5 times your salary. However, keep in mind that other financial obligations like loans, credit cards, and car finance can also be taken into consideration.
A mortgage calculator can provide an estimate of your borrowing potential, but it’s important to remember that these figures are only for illustrative purposes. For more accurate and customized calculations, it’s recommended to consult with a mortgage broker.
Speak to a broker who specialises in umbrella mortgages
Finding the right lender as a contractor can be challenging, especially when searching for a broker specializing in umbrella mortgages. Many mortgage brokers market themselves broadly, making it difficult to find someone familiar with umbrella companies and their relation to mortgages. To locate a suitable broker, consider seeking recommendations from other contractors or industry professionals who have experience in this specific niche. Additionally, online research and industry forums may provide valuable information and insights.
We appreciate your interest in our broker matching service. To assist you with finding the right broker for your needs, please feel free to give us a call at 020 3500 2646 or submit an online enquiry. Our specialist broker and team will promptly assess your situation and organize a no-obligation discussion with a broker who we believe possesses the ideal blend of skills and experience for you.
THE CONCLUSION
A self-employed umbrella company worker has to deal with many assessments before applying for a mortgage. If you are unsure about your mortgage details and the procedure involved, you should find a specialist to help you with the mortgage application and lender.
Frequently Asked Questions – FAQs
What is an umbrella company mortgage?
An umbrella company mortgage is a type of mortgage specifically designed for individuals who work through an umbrella company. It takes into account the unique financial circumstances of contractors and freelancers who receive income through their umbrella company.
Who is eligible for an umbrella company mortgage?
Contractors, freelancers, and self-employed individuals who receive their income through an umbrella company are typically eligible for an umbrella company mortgage. Lenders may have specific criteria for eligibility, so it’s best to consult with a mortgage advisor.
How does an umbrella company mortgage differ from a traditional mortgage?
An umbrella company mortgage takes into account the irregular income and unique financial circumstances of individuals working through an umbrella company. Lenders may consider contract earnings, day rates, and other factors that are specific to contractors and freelancers.
What documents are required for an umbrella company mortgage application?
Documents typically required for an umbrella company mortgage application include proof of income from the umbrella company, bank statements, tax returns, and a contract or statement of work. Lenders may have specific requirements, so it’s important to check with the lender or a mortgage advisor.
Can I get an umbrella company mortgage if I have a limited credit history?
Lenders may consider applicants with limited credit history on a case-by-case basis. It’s important to demonstrate a reliable income and manage any existing credit responsibly to improve the chances of approval.
What are the advantages of an umbrella company mortgage?
Advantages of an umbrella company mortgage may include tailored affordability assessments, flexible underwriting for contractors and freelancers, and the ability to use contract income for mortgage affordability.
Are there any disadvantages to an umbrella company mortgage?
Disadvantages may include potentially higher interest rates or fees, as well as the need to provide additional documentation related to contract income. It’s important to weigh the pros and cons based on individual circumstances.
How can I find a lender offering umbrella company mortgages?
It’s advisable to consult with a mortgage advisor or broker who specializes in mortgages for contractors and freelancers. They can help identify lenders who offer umbrella company mortgages and guide you through the application process.