Before the IR35 legislation change, most banks and building societies were happy with the gross contract value for most day rate contractors. Using contract rates benefited the contractors as it was flexible.
IR35 has caused intricacies and not all high street banks have been able to find a solution which is flexible as before. Some mortgage lenders have explicitly conveyed their stance on IR35 and how they will assess such applications. However, other banks and building societies are yet to incorporate these changes into their lending criteria. Unfortunately, a lesser number of mortgage providers accept contracts inside IR35.
From a lender’s perspective, a borrower contracting through their limited companies had more disposable income. This is because they withdrew minimum salary and dividend and contractors shared income with their spouse, therefore, paid less national insurance. Now the same fixed term contractor on PAYE or contracting via an umbrella company has lesser disposable income. The other concern is that lifestyle spending or expensive hobbies might not be able to be cut down which makes the day rate contractor more financially vulnerable. This may lead to you not being able to keep up with the monthly mortgage payments.
When a person is considered to be inside of the IR35 legislation, the following apply:
• They pay tax and national insurance as if they were a full-time employee
• They get paid via an umbrella company, the client’s payroll or their limited company
• They get the same take-home pay as a full-time employee
When a person is considered to be outside of the IR35 legislation, the following apply:
• Their income is split between low salary plus dividends.
• They work through their limited company
• They get higher take-home pay than an employee earning the same base salary
Most mortgage lenders will require the day rate contractor to demonstrate a history of being in the same line of work for 2 to 3 years. The Mortgage provider will also check how long the contractor has operated under the umbrella company or as a PAYE and also check the clauses on the contract.
Looking at our top ten lenders and how they have changed affordability for the people within IR35 the data isn’t exactly clear. Most are doing an enhanced affordability check and are now asking for not only contracts, proof of how long they have been a contractor and SA302s / Company Accounts.
Currently criteria is being monitored and reviewed and we are waiting to see just how big of a change this may have with providers but we will of course keep you updated when we have further information, if in doubt contact the experts who will be happy to assist on firstname.lastname@example.org.