Contractors, IR35 hasn’t forced Halifax to change its mortgage lending criteria
In the contractor mortgage market, a bit like with IR35 and elsewhere -- a little knowledge is a dangerous thing. And that danger increases when that ‘little knowledge’ is disseminated to others, writes John Yerou, chief executive of contractor mortgage specialist Freelancer Financials.
What’s been said
In particular, a recent LinkedIn post stated that popular home loan lender Halifax had updated its contractor mortgage lending criteria “following the recent [IR35] decision in Northern Light Solutions Ltd.”
The poster’s suggestion was that the June 2021 judgment against Nationwide IT contractor Robert Lee had spurred the Halifax into altering the criteria upon which the lender is prepared to lend on.
What the facts are
The fact is that a refresh in Halifax’s online pages aimed at contractors did occur in early July, and that refresh was made just after the verdict in the Lee case. But the truth is also that while IR35 has forced the hands of contractors, the legislation has not directly affected Halifax’s policy on lending to contractors.
If lenders like Halifax have reacted to anything (at all), they have reacted to the shift in the payment structures contractors are now favouring, because a growing number of contractors are now PAYE umbrella (potentially because of IR35, but potentially not because of IR35). That’s the key difference, and it’s one ContractorUK readers should keep in mind when reading the following outline of Halifax’s contractor mortgage lending criteria (accurate as of August 2021).
What is Halifax’s home loan policy if you’re a contractor?
In Halifax’s own words, the lender will categorise contractor customers as ‘employed’ for mortgage purposes if they are:
- Earning £500 per day; or;
- Earning £75k per annum or;
- Are an IT contractor on any income.
The use of the word ‘now’ on the Halifax’s website (i.e. “this is now our lending criteria”) might have thrown off some people, including the original LinkedIn poster. But the truth of the matter is that the above numbers, and the “employed for mortgage purposes” condition, have been the criteria at the Halifax for years.
Lee is a red herring
So, as much as it would be nice to think that lenders like Halifax are watching the courts for direction on the status of their customers, they are not. In short, Halifax’s contractor lending criteria has nothing to do with Robert Lee or his Northern Light Solutions Ltd losing its IR35 appeal.
Potentially pleasing many contractors fed up with IR35 however, we are aware of positive changes that some of the big lenders are currently considering, regarding their criteria for contractors who work through umbrella companies.
Halifax’s affordability tests: how much it lends to contractors
For now though, Halifax will assess contractors’ affordability based on their annualised contract income over 46 weeks. It used to be calculated over 48 weeks but Halifax changed this in line with other contractor-friendly lenders a few months ago.
In addition with Halifax, there is no minimum contract rate for IT professionals, but other contractors must be on a minimum daily rate of £326/per day. Previously, this used to be £312.50/day but it changed when the revision from 48 weeks to 46 weeks was made.
For example, £326/day x 5 x 46 = £75,000. Contractors outside of IT must be earning a minimum of £75k per annum over 46 weeks. This equates to £326/day. Similarly, non IT-contractors working less than 5 days a week, must be on a minimum daily rate of £500/day.
Non-financial criteria if you borrow from Halifax
Away from the numbers for a moment, keep in mind that Halifax will accept contractors’ application from their VERY FIRST contract. So no contacting history is required.
Alongside the speed and simplicity of Halifax mortgage applications for contractors, it’s not difficult to see why the lender remains popular for such atypical workers (despite points 5 and 6 below).
For interest and reiteration, here’s a summary of Halifax’s lending criteria for contractors:
- Halifax has no minimum daily rate for IT contractors
- Non-IT contractors must have a minimum daily rate of £326 (£75k gross per year) –over 46 weeks.
- Contractors on their first contract need to have been working in the same profession for a minimum of two years.
- At time of application, the borrower generally should have at least 4 weeks remaining on their current contract. If not, they might need to provide evidence of a contract renewal/extension.
- Halifax don’t like to see more than a 4-week gap between contracts in any 12-month period.
- Please note that cases submitted through PREMIER can be assessed more strictly.
To calculate relevant earnings, Halifax uses the following calculation:
- Multiply the contractor’s current contract rate by the number of days worked per week.
- Then multiply that total by 46 weeks; i.e. the number of weeks per year used to calculate their gross annual contract earnings;
- Maximum income multiple is generally 5x gross annual contract earnings (regardless of whether it is single or joint application) and subject to credit score and LTV of the case.
What documentation does Halifax require?
- Proof of ID and 2x Proof of Address
- Current contract
- Generally, Halifax does not request copies of your contractor CV and bank statements but if the case gets manually underwritten, they will request such documents.
- Halifax will want pay slips from an umbrella company contractor
Important, but not new
It’s an important consideration that in the post-IR35 reform world, Halifax applies the above criteria to contractors operating through a Personal Services Company (such as a limited company), or an umbrella company.
But other than the reduction from 48 weeks to 46 weeks (with the minimum day rate up from £312.50 to £326.00), Halifax’s contractor lending criteria has not changed. So as even the very quickest LinkedIn poster should be able to see, the lender’s criteria is not impacted by IR35, one way or another.
Read more about getting a contractor mortgage here.