AWR isn’t mortgage material for umbrella contractors
By Tony Harris, of independent financial advisory to contractors Contractor Money
Last month saw the introduction of the Agency Workers Regulations (AWR), which have changed the way that many contractors work through their umbrella company. AWR is designed to bring working conditions in line for both agency and permanent workers, whereby after an initial 12-week period, the temporary worker is, in theory, entitled to claim the same pay, rest breaks and annual leave as his or her ‘permie’ colleagues. You’d be forgiven for thinking that the seemingly far away topic of mortgages can’t possibly be affected by what’s been called the biggest shake-up to recruitment that most in the industry can remember!
AWR – For lenders, it’s a further complication
But that’s because much of the focus has been on the extra cost the rules saddle on end-users. Far less attention has been given to the very real concern that the AWR might actually make it far harder for contractors to secure a mortgage. This is because AWR represents a further complication to an employment status that has always been viewed as risky in the eyes of many lenders.
Traditionally, those individuals who work through an umbrella company have always struggled to get mortgage lenders to accept that a contractor is paid via a third party, particularly where the contractor’s payslip features terms such as expenses, and VAT-able payroll fees.
‘No name – no deal’
Our solution has been to negotiate with mortgage lenders so that a select few institutions will measure income as the gross annualised contract alone. This means that affordability usually ceases to be an issue, regardless of how the contractor then chooses to work – whether that is through a limited or an umbrella company. In this way, a contractor was able to rely on qualifying for a larger loan than if (or when) he or she was permanent. Crucially, however, any contractor applicant hoping for a home loan from one of these select institutions is required to have a contract with his or her name on it, in order to qualify for such accommodating criteria.
AWR = Fewer named contracts
Although the AWR has not affected limited company contractors eying such annualised contract-based mortgage applications, it has prompted many umbrella companies to firm-up on the employed status of their clients. This in turn has meant that, increasingly, umbrella contractors are not being mentioned on the contract and this has caused them problems in qualifying for such specialist, contract rate-based mortgages. Their payslips, meanwhile, still mention a myriad of headings and deductions of fees, making mortgage companies extra wary.
AWR = More complex lending decisions
As much as affected contractors are able to speak up, it is the lenders who are being the most vocal about the concern when dealing with umbrella clients. The lenders say that, under the AWR, their lending decisions are becoming far more complicated because the worker’s payslips fail to show what the individual truly earns. Just this week we were forced into explanatory-type talks with the Risk department at a major high street lender, whose personnel was struggling to understand the umbrella company model.
Payslip numbers don’t fit into lenders’ boxes
Disconcertingly, they are not the only lender pointing out that once expenses, payroll fees, pension contributions and other fees are taken off, a payslip of an umbrella contractor does not reflect the gross contract amount that the contractor really earns.
As stated previously and above, we offer bespoke underwriting based on the contract alone but the contract may not be forthcoming now as, under the AWR, the worker through an umbrella company is often classed as an employee instead. That therefore means we’re having to use all our influence with the lenders to ensure that clients are still allowed to use the gross contract rate as income verification.
But being rejected, by one lender say, could actually be the lesser evil. Yes, the AWR poses a new challenge to some umbrella company contractors wanting mortgages, but yes, such workers should also not hesitate about coming clean about their working reality. This means that when applying for a mortgage, it is imperative that contractors properly disclose the fact that they work on a short term contract (if of course they do); otherwise they could be committing mortgage fraud.