Does taking an inside IR35 contract affect future mortgage applications?
‘Does taking an inside IR35 contract affect future mortgage applications?’ is a relevant topical question, and I understand the catalyst for it. It comes at a time when Halifax has clarified its lending criteria for all types of employees, writes John Yerou, CEO of Freelancer Financials.
As there is no mention of IR35 in Halifax’s new lending criteria, it's right to question the legislation's bearing on future mortgage applications. But there's a reason IR35 isn't mentioned, and, when you think about it logically, you'll get the gist, too.
Using Halifax as the yardstick by which to measure other lenders
For the purposes of answering this question, I'm going to use the new Halifax terms as the fallback position. That's because, time and again, Halifax has led the way in contractor mortgages.
Their new criteria show just how open they remain to independent freelance and contract professionals, despite all the new risk factors lenders are facing in the wake of the ongoing covid-19 pandemic. I also think that it won't be long before more contractor-friendly mortgage lenders follow a similar path to the Halifax’s.
The caveat against which all this advice is given
Before I go on, let’s emphasise something key. There is no overarching law that tells banks and building societies how to deal with self-employed applicants. At any given time, any number of lenders might provide the best option for you, whether you're inside IR35 or not.
So there is no ‘x + y = z formula’ we can apply across the board. Deals change daily. Some lenders are more amenable to time taken off between contracts, or will offer a higher 'income multiplier' than others.
Yet others may provide a specific product, maybe an offset mortgage, that might suit your situation best. You're always, without exception, best off calling a contractor-specialist mortgage broker before approaching a lender direct yourself.
Treating contractors as employees
What's clear from Halifax's updated lending criteria is that once a contractor reaches a certain point in their contracting career, the lender will (in effect) treat them as an employee on PAYE.
The basic conditions a contractor must meet to secure this treatment, are that they must:
- either earn £500 per day/£75k-per-annum or be an IT Contractor (any income);
- have racked up >12 months continuous employment, plus have >six months remaining on their current contract, or
- at time of application, have two years’ continuous service in the same line of work
Additionally, if the client or umbrella company for whom the contractor works pays their tax, Halifax will treat them as an employee.
How does this help answer how IR35 affects mortgage applications?
Think about this dynamic from a role reversal aspect. When a mortgage adviser asks a PAYE employee what their income is, the employee doesn't give them their amount after tax. They give them their gross annual salary. Similarly, the adviser doesn't go through payslips looking for deductions; they just want proof that the employee is consistently earning and banking what they claim.
It's the same for contractors. Lenders annualise their gross day rate to work out an equivalent 'salary' for their affordability calculations. Once they've established that top line annual figure, and proved it with bank statements, that's it. They won't go into deductions.
Even if a contractor is working inside IR35, the difference between what an IR35-caught individual and a PAYE employee on the same rate would 'take home' is negligible.
IR35, against updated criteria, becomes a moot point, which is why we:
- jumped on 'that' LinkedIn rumour in the first place, and
- didn't mention IR35 in our previous article for ContractorUK setting out Halifax’s lending criteria, as all it does is muddy the waters!
If you come up against a mortgage adviser or broker who asks you about your IR35 status as part of your home loan application process as a contractor, you now have an argument to combat their objections! If they persist, then you're probably talking to a mortgage lender that's not perhaps as contractor-friendly as they claim. In short, do yourself a favour and talk to us instead!
The answer you’ve been searching for all this time…
If you’ve skipped to the bottom of this article in the hope of quickly finding out the answer to the question -- ‘Does taking an inside IR35 contract affect future mortgage applications?’, here’s the answer you’re looking for:
Answer: No. IR35 only affects the way you’re taxed. For mortgage purposes, you will be assessed the same way as before, depending on whether you operate through a limited company or an umbrella company.
You can read more about contractor mortgages here.