Umbrella companies are an ideal solution for contractors who want to avoid managing a payroll, changing invoices and handing HMRC.
They are also a key way of paying many temporary workers especially since the IR35 changes that made a limited company no longer available as an option for public sector companies.
While working this way does have its advantages, it can also prove challenging when it comes to getting a mortgage.
In this article, we will look at the key points around getting a mortgage when you are paid through an umbrella company:
- What is an umbrella company mortgage?
- How does eligibility work?
- How much can you borrow?
- Differences between umbrella companies and limited companies for mortgages
What is an umbrella company mortgage?
An umbrella company mortgage is a mortgage product that is aimed at people who receive income through an umbrella company. There is a more limited market for this kind of product with other types of mortgages and many high street lenders will not attempt to offer a product for them.
Many umbrella company workers have their standard minimum wage then receive commission or bonuses based on funds generated. Others have more complicated arrangements and don’t have that basic salary element. But there are lenders who will consider these situations and include things like bonuses, allowances and commission when working out what it available.
There are a few benefits to using this kind of specialist mortgage provider:
- Contract value, not payslips
Specialist mortgage companies will look at the overall value of the contract rather than the actual payslips that you receive. As long as the contract is signed and consistent with the pay received and has been in force for a certain period of time (usually 6-12 months) they will consider this.
- Evidence of regular income
Another benefit is that specialist lenders will look at the history of earnings through the umbrella company. This is ideal if you don’t have your own accounts or evidence of income until the end of a tax year – umbrella companies can often provide income proof on a weekly or monthly basis.
- Borrow more than if self-employed
An umbrella company arrangement often means you can borrow more than you would for a standard self-employed mortgage. That’s because the lenders look at the business as a whole rather than just your profit at the end of the year.
Drawbacks of umbrella scheme mortgages
The main drawback of seeking an umbrella scheme mortgage is as mentioned – a lot of companies including well-known names won’t consider it as a source of income for a mortgage. Others will not consider you if you work with multiple firms at once. But that doesn’t mean you can’t get a mortgage as a broker will have a range of options available.
How does eligibility work?
The basics of eligibility for umbrella scheme mortgages is the same as with other types of mortgage but then there are also special criteria that are used.
Basics that the lenders will want to know include:
- How long you have been working through umbrella companies? A history of 12 months or more is often viewed favourably by the lender
- Has your contract been renewed? If you have had at least one renewal of your contract, this is also seen favourably
- Do you work with one or multiple companies? Some contractors or agencies will work with multiple companies while others work with just one. There are lenders who will consider both situations
General affordability criteria will also apply so lenders will look at:
- Age of applicants – some only consider over 25s
- Adverse credit – if you have had credit problems in the past, this could further restrict which lenders will consider you
- Income – the more the better and some lenders will consider commission or bonuses payments while others will not
- The type of property – non-standard construction, listed buildings or anything that isn’t standard bricks and mortar could be harder to get a lender to accept
How much can you borrow?
Each lender has their own system that they use to decide how much you can borrow, although they have to also look at questions of affordability as well.
Company contract rates
One simple illustration of how much you could be able to borrow is with using company contract rates. Normally, a day rate is times by 48 weeks, and this is multiplied 4-5 times to find an idea of how much you can borrow. So if you had a day rate of £200, that would amount to £48,000 a year and this would mean borrowing between £192,00 and £240,000 depending on how many times your income the lender will allow.
If you have payslips from the umbrella company, then the lender may consider your gross pay which is not as much as the day rate. But some might consider other factors such as the size of your deposit and other financial commitments.
Differences between umbrella companies and limited companies for mortgages
A common question is the differences between umbrella companies and limited companies for mortgages. Both will require specialist lenders and many high street companies may not offer their products for you.
With a limited company, your net take-home pay is often higher than an umbrella company due to tax savings and this can improve the position for mortgages. But most lenders will accept your earning and dividends for the last 2-3 years so this could still cap how much you can borrow.