CONTRACTORS are starting to find out they may be in a mortgage trap, brokers have warned, following new tax rules introduced in April that are affecting at least 700,000 workers.
One said: “April’s umbrella change-around turned contractors into strangers with their own bank” and that “nobody in Government thought about mortgages when they rewrote the rules”.
Another added the result can be “reduced borrowing power, delayed purchases and remortgage customers falling back on whatever product transfer their current lender offers”.
Since 6 April of this year, responsibility for PAYE has been with the recruitment agency, or with the business the contractor works for, rather than with the umbrella company itself.
An HMRC policy paper put at least 700,000 workers in umbrella companies, at least 275,000 of them with an operator that had failed its tax obligations.
Brokers say the changes in the way people are paid are putting many in a difficult position when it comes to remortgaging or buying a home for the first time.
Ranald Mitchell, Director at Charwin Mortgages, said: “Many contractors have found themselves in a mortgage trap as a result of the changes.
“The problem is that lenders can end up judging the wrapper rather than the worker. A contractor can have the same client, same role, same £500-a-day rate and years of proven earnings, but when they move from an umbrella to agency payroll or a limited company, they suddenly become a very different mortgage proposition.
“Good lenders will join those dots, while rigid lenders often will not.
“The result can be reduced borrowing power, delayed purchases and remortgage customers falling back on whatever product transfer their current lender offers.
“The industry needs to recognise continuity of earnings across changing employment structures.”
Martin Rayner, Financial Adviser at Compton Financial Services, said “the April umbrella changes have created a ridiculous situation for some contractors”.
He added: “Same person, same client, same job and often the same day rate, but suddenly they look completely different to a mortgage lender.
“Someone paid through an umbrella in March might now be on agency payroll or working through a limited company.
“Economically very little may have changed, but mortgage underwriting is built around neat employment boxes.
“The good news is that the clock does not always restart. Some lenders will look through the new structure and use a contractor’s track record, current contract and day rate.
“Others may want fresh payslips, accounts or more history in the new setup. That difference matters.
“A perfectly good borrower can suddenly find their lender choice narrowed, leaving them reliant on a product transfer or delaying a purchase. The mortgage industry needs to recognise continuity of work, not just continuity of paperwork.”
Matt Coulson, Founder at Heron Financial, said “the trap is real but it’s often more about which lender you go to than the rule change itself”.
He continued: “Nothing has changed about the contractor’s income: same role, same client, same day rate. What’s changed is the wrapper it’s paid through.
“A mainstream lender’s system can read a day-old limited company or a fresh PAYE arrangement as a brand-new, unproven situation, then ask for two years’ accounts or months of payslips that don’t yet exist.
“The better news is that contractor-friendly lenders underwrite the day rate and the length of the contracting history, and look through the wrapper change to the continuity underneath. That’s where placing the case matters.
“We do see people caught out, usually when they restructure and then apply without realising a high-street model resets the clock.
“So it comes down to timing and lender choice: know which lenders count the track record before you restructure. Handled well, it slows a case down but rarely stops it.”
Harry Goodliffe, Director at HTG Mortgages, said “April’s umbrella change-around turned contractors into strangers with their own bank”.
He added: “Someone who moved to a limited company has the same client and day rate, but on paper they’re a new business, and most high street lenders want a year or two of accounts before that income counts.
“The specialist lenders will still work off the day rate and a track record in the same field, so the clock only restarts if you walk into the wrong bank.
“Many do, then take whatever Product Transfer their existing lender offers rather than shop around. Nobody in Government thought about mortgages when they rewrote the rules.”
David Stirling, Independent Financial Adviser at Mint Wealth, said: “Fix one leak in the tax system and the water usually finds a new room to flood. This time it’s mortgage underwriters, not Whitehall, mopping up the mess.
“Nobody voted for contractors to become overnight mortgage risks, and nobody announced it either.
“It just arrived quietly, hidden inside a rule written for HMRC’s compliance targets, not a broker’s affordability calculator.
“Until someone joins those dots publicly, the people paying for this fix won’t be the umbrella companies it was aimed at, but the contractors stuck trying to prove continuity of a career they never actually stopped having.”
Photo by Rayson Tan on Unsplash
