Limited Company or Umbrella Company – contractor mortgage options
As a contractor, you can set yourself up as a limited company or work with an umbrella company. There are pros and cons to both options. But the good news is, whether you operate as a limited company or umbrella company - contractor mortgage options are plentiful for both ways of working.
Under an umbrella company, you are an employee of the scheme and the umbrella acts as a go-between for you and the client. The umbrella company pays you directly (so you don’t need to negotiate with or chase the client). You pay the umbrella an admin fee for this service and your IR35 status is irrelevant as you are taxed as an employee.
If you operate as a limited company, you have many more financial obligations to fulfil but this is often a more tax efficient way of operating. You usually pay yourself a salary and dividends to extract income from your business.
Whether you contract via a limited company or an umbrella company, these two different ways of working could also affect your mortgage application.
Proof of income
Following on from the Mortgage Market Review in 2009, all mortgages are now based on an affordability assessment, where both your income and outgoings are taken into account when calculating the amount you can borrow.
However, for both umbrella and limited companies, it can be tricky to prove your income to a traditional mortgage lender.
With an umbrella company, you can receive a traditional mortgage reference as you are an employee of the umbrella. You may assume this makes an umbrella company a safer option, compared to a limited company, but a mortgage lender will also look into the nature of your work and pay.
As a result, you may run into issues if your umbrella pays you the statutory rate and then tops up your wages with a bonus or commission. This is often not viewed favourably or fully understood by some traditional mortgage lenders.
For example, your mortgage lender may ask three months of payslips and a P60 to assess your income. However, your payslip may not provide evidence of your full pay - but some lenders will only accept this as evidence of your income. Consequently, your lending options are severely limited and you will not be able to borrow as much as your income should allow.
If you operate as a limited company, your net take home pay is often higher compared to an umbrella due to the resulting tax savings. However, the vast majority of lenders will only accept your salary and dividend drawings from the last two or three years when considering a mortgage application. As with those working under an umbrella, this could substantially reduce the amount you can borrow.
You will also need to provide proof of income in the form of HMRC self-assessment statements and your company accounts for the last two to three years when you run a limited company.
This can catch out some contractors who may have recently moved to work as a limited company, and if they do not have the two to three years of accounts to backup a mortgage application.
The importance of specialist contractor mortgage advisors
Whether you operate as a limited company or umbrella company, you could struggle to easily demonstrate your affordability and true income to mortgage lenders with both ways of working.
If you use a specialist contractor mortgage advisor, you should be able to use all of your income (from either your limited company or umbrella company) to help with your mortgage application and affordability assessment.
Such specialist advisors usually have long standing relationships with mortgage lenders and work closely with them to confirm that your affordability range is higher than your salary and dividend/commision income would initially suggest. As a result, you should get access to a wider range of contractor mortgages at competitive high street rates.
Limited company or umbrella company – contractor mortgage options
At Contractor UK, we have teamed up with CMME; one of the UK’s leading mortgage specialists for contractors, freelancers, and business owners. As a result, you should be able to borrow up to five times your annual income.
This is because CMME has access to a specialist underwriting service with a high street lender. And, whether you’re using an umbrella or limited company, CMME also has an agreement in place with lenders that it can supply your current contract as evidence of your income, as opposed to just supplying payslips and dividends/commissions.
If you’re contracting as a limited company, this could also allow you to borrow based on just one year’s accounts.
What’s more, limited company contractors could also consider a buy-to-let mortgage where you use your retained profits to invest in a rental property or growing an existing portfolio.
The CMME website states: “The method used to determine your personal income varies from lender to lender, but in essence we will agree with an underwriter a level of income that is deemed to be acceptable for you, by annualising either your hourly or daily rate of pay. By doing this, we are able to provide you with the means to use the majority of the income that you receiving from your [limited or] umbrella company to demonstrate to the lender that affordability should not be a concern.”
If you would like to find out more about your contractor mortgage options as either a limited company or umbrella company, please click here.