Halifax lending criteria: But are you a contractor, an employee or self-employed?
Halifax Bank has tweaked not changed (‘changed’ is too strong a word) its contractor mortgage lending criteria in recent weeks.
The lender published an update in July 2021, which has led to (unwarranted) concern in the contractor ranks. Once and for all, here’s Halifax’s stance on lending to you, whether you’re a contractor, PAYE employed or self-employed, writes John Yerou of Freelancer Financials.
Why did a small update cause so much consternation?
Ask contractors who the best mortgage lender for them is and many (most, even) will say ‘Halifax.’ It stands to reason. The bank was the first to develop a working contract-based underwriting policy. It was the first lender to accommodate all contractors, not just IT contractors.
In short, the lender provided the modern ‘contract-based underwriting’ template that other lenders moulded to their own KPIs. And while there’ve been many pretenders to the crown, Halifax have remained the most consistent mortgage lender for independent professionals for over a decade.
So, when well-intentioned but inexperienced commentators recently added 2 and 2 and got 5, ripples disturbed the usually serene waters. To help restore the calm, here’s Halifax’s affordability criteria, depending on your payment structure.
Are you an umbrella or independent contractor (who pays their own tax)?
If the above describes you, such contractors will need to provide a copy of their current contract to the Halifax, and their latest payslip for comparison. Where the contractor does not have a payslip, they will need to offer their latest bank statement.
Halifax will then annualise both the gross contract and the amount from the payslip/bank statement. Whichever amount is lowest, this is what they’ll use as the basis of affordability.
How Halifax ‘annualises’ income
All lenders use an estimation of annual income as the basis of mortgage affordability. Extending a daily or hourly rate to work out that gross ‘salary’ (for want of a better term) is called ‘annualisation’.
Unless the contractual hours are specified on a contract, Halifax uses the following calculation to ‘annualise’ contract income:
- If on hourly rate, day rate = hourly rate x 7
- Day rate x 5 = weekly rate
- Annualised rate = weekly rate x 46
So, if a contractor is on £40/hour, the calculation would look like:
- £40 x 7 (hours) = £280/day
- £280 (day) x 5 (days per week) = £1,400/week
- £1,400 (week x 46 (weeks per year) = £64,400
So, if a contractor is on £40/hour, Halifax will use £64,400 as the base of the mortgage affordability calculation.
For Halifax to work out affordability from a payslip or bank statement, the equation differs slightly. Again, the following extension assumes no specific working hours are dictated on the contract.
Halifax will use the gross pay to formulate an annualised figure. Like the ‘Contract Income’ example, the lender uses a 46-week year as the template.
If you are paid weekly on a payslip, the lender will simply use the weekly amount x 46 to arrive at the annualised figure.
If your payslip is monthly, the lender will:
- Multiply your monthly gross amount x 12 (= gross annual ‘salary’);
- Divide ‘annual figure’ by 52 (= 52 equal weekly pay amount);
- Multiply ‘equal weekly pay amount’ x 46 (= final ‘annualised’ amount, including factored vacations).
So, if you earned £6,000/month gross, the calculation would look like this:
- £6,000/month x 12 = 72,000
- £72,000 divided by 52 = £1,384.615
- Multiplied x 46 = £63,692.31 ‘annualised’ income.
Agency workers, CIS contractors, umbrella employees
The same method is used to determine affordability for another type of borrower -- fixed/short-term or agency workers, where the agency/client deducts tax. Such applicants will need their latest payslip, or latest three payslips where they are using ‘other income’.
Likewise, the same method is applied to CIS contractors. Halifax will use the last three months’ payslips, verified by bank statements, as income evidence. The lender will then use the average monthly figure as the basis of their annualised calculation.
For as long as we have had contract-based underwriting, umbrella payslips have caused lenders problems!
The breakdown of components on said-payslips has been the thorn in their side: basic salary; commission; ‘additional taxable income’; holiday pay; expenses, etc. Far from easy for lenders to find a neat little box on their computers to enter all these!
Seeing the mini-exodus from independent to umbrella contractor has forced lenders to revisit their policies. And the following statement from Halifax regarding umbrella payslips explains how the lender has simplified umbrella contractor income for mortgage affordability purposes:
“As long as the contract confirms the contractor is paid via a daily rate, or hourly rate, the income does not need to be split into these separate elements and can all be keyed as basic salary.”
It’s worth reiterating -- each contractor applicant must provide both the copy of their contract and their payslip or bank statement. Whichever amount extends to the lowest value is the one the Halifax will use as the basis of mortgage affordability.
Halifax’s self-employed criteria is somewhat straightforward, by comparison.
If you pay your own tax, the lender will class you as self-employed. Likewise, if you have more than one contract or are director of a limited company which employs other contractors, you fall into the ‘self-employed’ bracket.
The Halifax’s advisers and underwriters will use a combination of accounts and your SA302 to work out your mortgage affordability.
There are too many variables to list here to give a firm ‘self-employed’ template. Years worked, accounts details, your industry, growth of business (or not), and more. Speak to a savvy self-employed broker and they can make the right judgement call based on your status from there.
For all intents and purposes (and be warned, this is where the layman trips up), Halifax treats contractors who match the following criteria the same as ‘employed’ applicants:
- The contractor earns >£500/day or >£75k/year, or is an IT contractor (any income);
- the lender will treat such contractors as employed irrespective of whether they pay their own tax or class themselves as self-employed;
- the exception is where the contractor has more than one client or employs other contractors (see self-employed);
- The company they work for pays their tax;
- The umbrella company by which they’re employed deducts tax.
To further qualify as employed, the contractor applicant must have
- >12 months continuous employment, plus >6 months remaining on their current contract, or
- At time of application, two years’ continuous service in the same line of work
As you can see, Halifax treats time-honoured contractors exactly the same as they would a PAYE employee of equal standing.
In this article, I’ve tried to simplify Halifax’s lending criteria for contractors as much as I can without slipping into jargon. If you are still unclear, please pick up the phone to one of our advisers.
Talk through your situation with them. It may be that a lender other than the Halifax is much more suited to your circumstances, even if your criteria matches the examples outlined above. Many other mortgage lenders are updating their policies in favour of umbrella contractors right now, given the recent favouring of this type of payment structure by many professionals.
Here's a thought I’d like to leave contractors with. Getting the right mortgage isn’t just about saving money. Rather, it gives you some license to face all other financial commitments without worrying about keeping the roof over your head. If you’re doing getting a contractor mortgage right, your financial freedom starts here.
Read more about contractor mortgages here.