When you apply for a mortgage in the UK, lenders weigh a variety of factors, from your credit history to your income stability and employment type.
For contractors and freelancers, the specter of IR35 can add an extra layer of complexity.
Understanding what IR35 actually entails, and how different lenders treat your status, can make a meaningful difference in your ability to secure financing.
Understanding IR35 and Its Purpose
IR35, officially part of UK tax legislation since the early 2000s, serves to distinguish between genuine self-employed contractors and those who function more like employees but under the guise of limited companies.
In simple terms, if your working arrangement mirrors that of an employee, for example, no ability to send a substitute, or being subject to tight control, then HMRC may declare your work as “inside IR35.”
That means taxes and National Insurance contributions must be paid more akin to traditional PAYE employment.
Conversely, working “outside IR35” means you’re genuinely self-employed and may benefit from tax efficiency.
Why IR35 Matters for Mortgage Applications
For most contractors, the key concern isn’t IR35 itself but how lenders assess the income implications of it, when you apply for an IR35 mortgage.
A contractor inside IR35 is taxed like a PAYE employee, often through an umbrella company arrangement.
Lenders familiar with contractor mortgages typically annualise your gross day rate to establish affordability, regardless of whether you’re inside or outside IR35. This approach essentially levels the playing field, provided your income calculation reflects your contracted rate and not take-home pay after deductions.
That said, the nuances of how umbrella payments are structured can affect lender perception.
Some lenders may closely scrutinise payslips and bank entries, focusing on net income, and miss the broader financial picture. Reviewing how deductions and employer-side charges are outlined on your payslip or statement can be critical in avoiding complications at underwriting.
Affordability Models: Day-Rate Annualisation Vs. Traditional Profits
Many specialist lenders use a method called contract-based underwriting, where your day-rate is multiplied by number of working days in the year (often 46 to 48 weeks) to arrive at an “annualised” income figure. From that figure, lenders apply multiples, typically four to five times your income, to determine your borrowing limit. This approach can considerably ease mortgage access for contractors, including those inside IR35.
On the other hand, mainstream lenders may still rely on company accounts or accountant-prepared profit figures. That can be limiting if you retain profits in the business or your company is relatively new and hasn’t produced a full year’s accounts yet.
Inside IR35: Still Eligible, But Choose Your Lender Carefully
Being inside IR35 doesn’t disqualify you from mortgage eligibility. Multiple lenders, including Halifax and others, recognise that the difference between inside and outside IR35, in practical take-home pay terms, may be minimal. In these cases, you’ll be assessed much like a salaried employee, based on gross income rather than net.
However, the challenge lies in identifying lenders who understand the contractor model and will apply the appropriate affordability formulas rather than relying on restrictive interpretations. This is where a specialist mortgage broker like AMS Mortgages can come in.
Tips for Contractors Navigating IR35 & Mortgage Applications
To position yourself advantageously:
- Work with a specialist contractor mortgage broker who understands both IR35 and lender nuances.
- Provide clear documentation, current contract, payslips, bank statements, and pay breakdowns.
- Be transparent about your IR35 status, but insist that lenders assess gross income annually, not net deductions.
- If under an umbrella company, ensure your payslips and bank statements are clear and itemised.
- Highlight continuity of contracts or pipeline work to demonstrate income stability.
IR35 fundamentally impacts how you pay tax, but when it comes to mortgages, what really matters is how lenders assess your income.
While being inside IR35 may complicate applications slightly, the right approach and lender selection can still secure a mortgage that reflects your true earnings.
If you’re navigating a mortgage application under IR35, talking to a contractor-specialist advisor like AMS Mortgages could greatly improve your options and make the process smoother.
