CIS Mortgage

3 Ways Your Contractor Status Can Impact Your Mortgage

We specialise in Mortgage Advice for Subcontractors paid via the Construction Industry Scheme (CIS)

Your home may be repossessed if you do not keep up repayments on your mortgage.

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Recent court battles involving companies like Uber and Deliveroo have highlighted there is nothing transparent in UK employment law: it’s more of a deep murky sink hole, rather than a beautiful, clear pool.

If you’re working as a contractor, you might be happy with the flexibility that the status gives you. But if you work too many hours per month for a single client, or get paid by the client during holidays, or if they provide your tools or equipment, then the tax man might decide you’re a de facto employee, and not a contractor after all.

This could result in HM Revenue & Customs seeking back taxes from you, with expensive consequences.

The rules that govern your status – IR35 – are notoriously complex. Certainly too nuanced for a blog, so you should seek an expert opinion. For now, let’s focus on what I know best – mortgages – and highlight 3 ways your contractor status might impact you, which I doubt you’ll even have considered.

The market for self-employed/contractor mortgages is growing rapidly, reflecting changing trends in employment. Traditional lenders such as High Street banks, sensing that your monthly income would be less predictable than the income of a ‘permanent’ employee, were previously reluctant to offer a mortgage loan to contractors. Now they are shifting their stance as the contractor market grows, albeit sometimes it is a very slow shift.

But you still need to watch.

It used to be the case that banks would ask for historic records of your earnings: usually accounts for at least two trading years were needed. That can mean the difference between getting the home you want today, or having to rent for another year, or longer!

Let’s assume you had accounts for the previous two years. The hurdles weren’t finished.

Many contractors create a limited company as a tax efficient way to bill clients. You might have done this too. So, a contract exists between the company you run as a director, and your client’s company. They hire you for X hours a month, and you bill them accordingly. In the meantime, you take a salary from your own company, and at the end of the year your accountant records all the legitimate business expenses you’ve incurred, against your company’s total income. This reduces your company’s profit, and you pay Corporation Tax on the balance.

If there was money left after Corporation Tax, you could supplement your salary with a dividend as well. Perfect!

Here’s the second catch you might not foresee. Most lenders look at salary when deciding on the mortgage offer they’ll make. But if you retain money in your business, even if you declare a dividend every year, that’s not classed as regular income by most lenders. In some cases, that can make a significant impact on how much you can borrow.

Most of our customers are electricians, builders, heating engineers, decorators, carpenters or general self-employed contractors, like you. We help them obtain a mortgage, and can help you get a higher offer by getting the lender to consider your gross annual income, rather than just your salary. Result!

But an issue I touched on earlier can also impact you in a final way. I suggested that you should check your status as a contractor with an employment lawyer or tax specialist. If you thought it might be easier to avoid any risk by not asking questions, here’s why you should think again. You see, lenders know about IR35 too, and if you can produce a letter confirming that IR35 definitely doesn’t impact on you, then the lender will almost certainly be prepared to offer you a larger mortgage loan. It’s about managing risks, and you’ve just become a safer bet for repayment in the longer term.

As well as the High Street banks, there are specialist lenders in the market too, but the same rules apply. As a CIS contractor, your status isn’t the same as an employee, but nor are you a traditional self-employed tradesman. That status is something many other mortgage brokers find difficult to reflect. But once you have an initial free chat with one of our advisors,  they will work out how much you can borrow on a mortgage, based on your contractual day-rate.

You see, the most important factor when it comes to arranging your mortgage is not to treat you like a self-employed worker, or a permanent employee. You’re different… but not unique. And we specialise in helping contractors just like you every day.

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If you’re reading this as a Construction Industry Scheme (CIS) contractor, then you or your partner are probably struggling to find a mortgage right now. We can help.

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