Contractor mortgages

ended 06. April 2022

A journalist at Yourmoney is writing an article about holiday pay and mortgage affordability. It's based on a thread on Mumsnet around workers who have holiday pay written into their contracts, which is not taken into account when applying for a mortgage. This means they're often being offered much lower amounts to borrow as the holiday allowance isn't counted as income.

She wants to know if there are lenders who will factor in holiday pay, what kind of jobs might have this holiday pay allowance written into a contract, and whether a broker can argue a borrower's case to boost borrowing for this type of borrower? Any other thoughts, jot them down. Deadline is COB.

4 responses from the Newspage community

Star Quote
"Mortgage lenders have precise rules for approving mortgages for contractors, and each lender has individual policies even between different types of contracting. Is it day rate, IT contracting, how much previous experience do you have, is it fixed term contracting, if so, for how long? Has the contract been renewed, and how long is left on the contract? As such, the nature of working as a contractor can be sporadic. That's literally the name of the game, you tend to get paid more for a role than if you were employed on the proviso that, if the business you're contracting to doesn't need you any more they can let you go. Given that mortgage lending is essentially time-travelling by a lender reaching forward into the future to drag back to the present day an advance on your income and ability to earn for the next 20-40 years you can understand why they may be reticent and enforce what seem like draconian rules, given that as a contractor you've likely got an end date of when that particular source of income will end. "Also, mortgage lenders are held to account by both the FCA and PRA and must be seen to be lending responsibly. People sometimes have short memories; remember all those self-cert mortgages that people took out saying they could definitely afford them, and they wanted them on an interest-only basis? Well how's that playing out now? You can't have it all your own way. I'm happy for people to borrow as much as they want as long as they agree to take personal responsibility if things go wrong. Unfortunately, as we've seen when things turn sour, people want to blame someone else, typically a lender that if they get into difficulties with their mortgage and their income suddenly stops they want to complain that it was irresponsible lending."
Star Quote
"Reading the original post on Mumsnet, this appears to be quite a unique feature of this particular contractor's agreement; it's certainly not something I have come across before. In terms of how it will be assessed as part of a mortgage application, that's going to come down to the individual underwriter and the lender's criteria, or more accurately how flexible they are with their criteria. Lenders such as Halifax, who the individual has applied to, are great in terms of a slick process and low rates, but they don't always have the underwriting flexibility to deal with unusual cases. Other lenders may charge a little more, but have the ability to deal with these types of application better. Knowing which lenders' doors to knock on will be key to finding the right mortgage, but I'd be confident that someone in the market would help, given what we are told within the original post."
Star Quote
"Day rate contractors are a fundamental pillar of British industry, essentially running their own business providing temporary expertise, consultancy and staffing to companies as required. Or at least they were, as like many other small businesses, the Government crucified them, this time with the reforms to IR35 in April 2021. Following the 2021 changes, it was not viable (or downright impossible) to operate as a small business. As a consequence there has been a surge in temporary staff working under a PAYE structure. Under a PAYE structure, the payroll provider will have to engineer some kind of holiday pay to meet legal requirements. It's effectively money the contractor earns but has to be allocated to a holiday fund, which most contractors will have paid to them as part of their normal pay packet. "As a previous day rate contractor myself for over 10 years it's an area I'm familiar with. Ultimately, mortgage lenders want to see regular or guaranteed income. Where a case can be put forward that income meets this criteria, there is a good chance a lender will take that income into account. The challenge for mortgage lenders is that in theory the contractor could take the holiday, rather than the money. It's an area riddled with complex lending criteria which significantly differs from one mortgage lender to another. Most will calculate based on day rate or payslips. Where all income is needed to justify the mortgage affordability, it is often better to take a longer term view and use documents such as the P60, which will show total annual income. But this needs to be put forward to the lender with a robust rationale as to why it is appropriate, and sustainable."
The answer will be dependent upon the terms of the contract. Lenders will work on average of earnings for Zero Hour employees or those who are temping provided they have a track record, most permanent PAYE employees are salaried, so they receive an annual income paid periodically it is the annual figure that is used, contractors who are on a day rate will typically have a 46 week calculation applied. To be able to advise accurately we would ask for a copy of the contract.