All Posts by Greg Dickson

Capped Rate Mortgages for Contractors

Capped rate mortgages are tied to the standard base rate of interest but which cannot go ever upwards and which are capped so they will not go over a pre-set level of interest and repayment. As such capped mortgages offer borrowers more security as they know their payments will never get too high and out of control, putting their home at risk. If then, you are someone who is looking for an added level of security when it comes to your mortgage – that your monthly mortgage interest repayments will never go beyond a certain level even when interest rates are very high – then a capped rate mortgage is perfect for contractors.

How Do Capped Rate Mortgages Work?

Capped rate mortgages are based on the same model as most variable rate mortgages, by which your interest payments each month will vary according to the movement of the standard variable rate of interest set by your mortgage lender or contractor mortgage broker, itself being based on the standard base rate of the Bank of England. However, the difference between standard variable rate mortgages and capped rate mortgages is that with a capped rate mortgage your interest will be capped at a certain pre-agreed amount, ensuring that the borrower never pays anything above that amount. The interest rates will fall or rise and the borrower will continue to pay the amount that their mortgage is capped at, until the rate (and amount) drops back below that level.

Capped Mortgage Rates

The capped rates that are on offer depend on each individual mortgage lender and what products they have at anytime. The capped rate that a borrower gets from their lender will frequently be at a higher level than the lender’s fixed rate or variable rate products simply because there are so many other benefits associated with a capped rate mortgage. Capped rate mortgages normally also have a well-defined minimum level to which the interest rate is allowed to fall, sometimes referred to as the ‘collar rate.’ Although capped rates do permit the borrower to save money in a lot of scenarios, any lender taking advantage of one might still potentially find themselves out of pocket if interest rates end up plummeting below this agreed collar rate.

Capped rate mortgages terms are usually set at an introductory period of between 2 and 5 years. Thereafter , the mortgage will most often revert back onto the lender’s regular variable rate for the remainder of the term of the mortgage.

The Advantages of A Capped Rate Mortgage

Capped rate mortgages will be of most benefit to people in times of high interest rates and are therefore advantageous when looking for security against the future and any potential rainy days. Get a capped rate mortgage and you will know that you cannot end up with massive mortgage payments that you were not expecting. This is a real advantage and not one that is offered by most other

Tracker Mortgages for Contractors

Tracker mortgages are mortgages in which the interest rate on the mortgage is set at an agreed level above the standard base rate. The mortgage then tracks that base rate religiously. Doing so means that such mortgages are often much cheaper than standard variable rate mortgages or fixed rate mortgages. Of course, with the tracker mortgage’s interest rate being linked to the Bank of England base rate, if that base rate changes then your mortgage rate will of course change too.

As an example, say the base rate is set at 0.5% (as it is currently) and you decided to take out a tracker mortgage with an agreed rate of 2% above that base rate, then you would end up paying interest at a rate of 2.5%. Should the Bank of England then decide to put the base rate up by .5% to 1%, your own mortgage interest rate would rise to 3%. What would that mean in real terms?  If you had a £200,000 mortgage, your repayments would increase by £50 per month.

Tracker mortgages come with various term lengths in the same way that fixed rate mortgages do. The standard tracker mortgage will be for a period somewhere between two and five years and if you want to exit that mortgage within that time frame you will end up paying significant penalties. There are also term trackers or lifetime trackers which are free of any penalties and which you can exit at any point. These are a great option if you don’t want to be tied to one product and like to chop and change.

The Advantages of Tracker Mortgages

One of the main advantages of tracker mortgages is that they are nearly always cheaper than fixed-rate mortgages. As well as that they are simple and do what they say on the tin- although they are a form of variable rate mortgage, if you know that you are paying a set amount over the base rate then you always know what you will be paying. And as with all forms of variable rate, you know you will not be stuck in a fixed rate if the base rate drops. When interest rates are low, so are your payments.

The Disadvantages of Tracker Mortgages.

Conversely, as with all forms of variable rate you also know that the rate that you sign on to may not be the one you end up paying if interest rates rise sharply. Tracker mortgages offer little of the security of fixed rates and if you are on a tight budget you need to be aware of just how much your payments could potentially rise and then work out if you could afford it if they do.

Variable Rate Mortgages for Contractors

When sitting down to try and work out what type of contractor mortgage will suit you it is important to ensure you know the ins and outs of all the different products you will encounter. Variable rate mortgages are very common and consequently it is essential that you understand what they do, how they work and what they will mean for your long-term financial plans.

Variable rate mortgages are mortgages in which the interest rate can change at anytime throughout the duration of the loan. When national interest rates set by the Bank of England rise and fall the interest rate of your lenders products will also rise and fall and in turn, so will your mortgage. Additionally, there are a number of different types of variable rate mortgage to choose from (all of which are discussed in more detail elsewhere on this site) including Tracker Rate Mortgages (which are set at a level just above the standard base rate and then track that base rate), Discounted Rate Mortgages (which are similar to fixed rates and which agree to a certain period at a discounted rate from the standard variable rate), and Capped Rates which also stick to the standard variable rate but which have a cap on how high that rate can go for a year or two).

The Advantages

Why would someone opt for a standard variable rate mortgage over a fixed rate? Firstly because a lot of people wouldn’t want to tie themselves to a fixed rate if rates were high. Secondly because when rates are high lenders will often choose to swallow rate rises into the cost of the mortgage repayment. Thirdly because variable rate mortgages are cheaper to set up and fourthly, because variable rate mortgages leave you free to overpay, make early repayments and do not charge you if you wish to change lender.

The Disadvantages of Standard Variable Rate Mortgages

There are of course some disadvantages too. Firstly, a variable rate mortgage does not offer any of the security of a fixed rate mortgage. If you sign up for a variable rate and then interest rates shoot up you will find your repayments rising significantly. This could lead to financial problems for you at a later stage. Also, your lender may choose to add their own increases on top of the base rate if they want to increase their own profits.

Variable rate mortgages are worth considering then if rates are high and you don’t want to fix in to repayments at that level or if you want a cheaper mortgage and / or know you will be making early repayments.

Discount Rate Mortgages for Contractors

As if all the different types of mortgage products for contractors weren’t confusing enough, people who decide to opt for a contractor variable rate mortgage then have a number of further choices to make as to what type of variable rate they want. As we have seen elsewhere on the site, variable rate mortgages are products wherein the rate of interest can go up or down at any time during the lifetime of the loan. Once the Bank of England base rate goes up you can be assured that your lender will follow, often adding a bit themselves too. On the other hand, if interest rates drop, being in a variable rate mortgage is much more beneficial than being tied into a higher, fixed rate.

Choosing which sort of variable rate mortgage is the right one for you can be a bit of a minefield though. As well as standard variable rate mortgages there are tracker rate mortgages, capped rate mortgages and discounted rate mortgages. All of these are discussed elsewhere on this site, whilst here in this article we will be looking at discounted rate mortgages.

What are discounted rate mortgages

A good way of thinking about them is to consider them like a standard variable rate mortgage but with a special offer that is designed to draw you in. They operate at a level that is cheaper than your lender’s standard variable rate whilst also being linked to it. As an example, suppose your lender has their standard variable rate set at 5% but the discounted being offered is 2% then your mortgage rate would be 3%. That discounted rate will normally be offered for a set introductory period, which can be anything between 2 and 5 years. As soon as that introductory offer ends you will be switched back to the standard variable rate.

The advantages of a discount rate mortgage.

Firstly, the main advantage of discount rate mortgages is that they are much cheaper when you start out. For people on a tight budget and trying to get on the housing ladder this can be a godsend and those first few years of lower mortgage repayments the difference between getting a house or not. Moreover, should your lender decide to cut their standard variable rate then people on discounted rate mortgages will see their repayments drop even further. Thirdly, if the base rate set by the Bank of England goes down you should also see a drop (though this is never guaranteed). Finally, they offer all the same advantages of standard variable rate mortgages – not being fixed in to higher rates, flexibility etc

The disadvantages

Firstly, some lenders who offer discounted rate mortgages will take away some of the benefits associated with standard variable rate mortgages, such as being a cheap option to set up and costing nothing to make early repayments. Instead, many will charge you early repayment charges if you decide to leave before the end of the tie in period and many will even charge you for two or three years after the discounted period. Secondly the advantages of the variable rate also become disadvantages sometimes; if the lender changes their standard variable rate for the worse then your discounted rate will follow suit and you might suddenly find yourself with increased (and unaffordable) mortgage repayments. The same applies if the Bank of England increases their base rate.

To summarise, discounted rate mortgages are best suited to those people who want to pay much less for the first few years of their mortgage but who are aware that rates can rise in the future. One way of preparing is to look at the standard rate when making plans and then consider the discounted rate as a ‘bonus.’

 

Offset Mortgages for Contractors

With savers struggling to find anywhere to put their money in the current economic climate, it is unsurprising that offset mortgages have been rising in popularity over the last couple of years. Offset mortgages were first launched back in 1994 in the UK but for a long time were very unpopular. However, as savers have begun to look around for the best place to make some money on their savings, contractors getting offset mortgages have seen a surge in demand thanks to the benefits they offer regarding thevsavings. Though the rates on offer from offset mortgages tend to appear less advantageous when compared to mainstream mortgages, in the longer term they can be very impressive, simply because they are able to cut years off of mortgage payments and allow savers’ money to work harder for them.

How do they work? In a nutshell, offset mortgages are simply mortgages in which you set your personal savings up against your outstanding mortgage debts and through giving up the interest you earn on your savings you do not have to pay the equivalent amount of interest on your mortgage debts. Over a number of years this can quickly add up to savings of thousands of pounds. This article will take an in-depth look at offset mortgages to help explain them better:

What is an Offset Mortgage and How Does it Work?

As mentioned above, an offset mortgage is a mortgage that is linked directly to a bank account (or a number of bank accounts). Every month the mortgage lender will then work out the full amount of interest that is owing on the mortgage and then this amount will be reduced by the total amount that is held in in the account (or accounts). As an example, if a borrower takes a mortgage of £200,000 and also has savings in their accounts of £20,000 then they will at that point only end up paying interest on £180,000. And if those savings were to go up or down in the months and years ahead, so will the amount of the mortgage on which the interest is charged also go up or down. For anyone who has savings this of course makes sense, particularly when there are so few savings accounts with decent interest on the market. By setting up an offset mortgage savers avoid any tax on savings interest they might have paid and their money works every day to bring down the costs of their mortgage – the act of paying interest on the difference between the balance and the savings effectively means that every month you are overpaying your mortgage.

Is there any Difference Between Current Account Mortgages and Offset Mortgages?

The difference is a small one, but some offset accounts let you link your current account and your savings accounts to the mortgage whilst others simply use things called a savings pot. Both essentially work in the same way. Offset mortgages keep your deposits and savings in these separate accounts or ‘pots’ but link the two together for the purposes of working out interest, whilst Current Account Mortgages (CAM’s) link the current account directly to the mortgage. With a CAM, borrowers will not see two different accounts but rather a mortgage and bank account combined on one single statement with everything calculated together. Thus, if the mortgage has £100,000 outstanding and there is £3000 in the current account the balance on there CAM account will show an outstanding debt of £97,000. In this CAM account the balance is recalculated every day and interest is paid only on that balance. Apart from that the account operates in exactly the same way as a normal bank account with all the same services and facilities. Additionally, borrowers using Current Account Mortgages can also move their savings into that account in order to bring the debt balance down further and can simultaneously also move any other outstanding debt such as credit cards or personal loans into the account.

What are the Benefits of Taking Out an Offset Mortgage?

 As mentioned above, offset mortgages can mean you pay a lot less in interest every month, which can mean your monthly payments are significantly reduced. Or alternatively you can keep overpaying and clear your mortgage a lot more quickly. As well as this you have more flexibility with you money which you can access at any time and other accounts can be offset in various ways.

What are the Negatives of an Offset Mortgage?

 The main downside is that any savings which you hold within your offset account will not earn you any interest. Moreover, if you don’t actually have many savings then you wont see much advantage in savings on your mortgage and may well be better switching to another mortgage deal.

That’s why offset mortgages are most advantageous for people with larger amounts of unused and stable savings. They can be a tax efficient mortgage for higher rate taxpayers and also useful for people with savings who want to help their family members by putting some of their savings in an offset account and helping to reduce the mortgage burden they are facing.

What are buy to let mortgages for contractors

Buy-To-Let mortgages for people contracting are once again growing in popularity as the economy shows the first signs of recovery and people look to invest their money once again. But with banks and building societies still offering measly returns on savings, people are once again looking to property as a relatively safe (the credit crisis having shown that even property can bring losses too) but profitable places to invest their money. But what exactly is buy-to-let and what are buy-to-let mortgages?

Most people understand that buy to let properties are properties that people purchase in order to let out to tenants and to treat as investment vehicles. Normally, people will buy a property with a mortgage and then rent it out for a number of years in order to pay off the mortgage and eventually either sell it for a profit or keep it as an investment that brings in a continuous income stream. Successful landlords will often buy more than one buy to let property and then keep adding properties as they go along until it becomes a full-time business managing all of their properties and the incomes they produce. A buy-to-let mortgage is a mortgage specifically underwritten for such property investments and designed to operate in a slightly different way to regular high street mortgages for properties that will be lived in as homes.

Criteria for Buy-To-Let Mortgages

That said, to all intents and purposes buy to let mortgages are the same as regular high street mortgages. They are designed to work the same way and built around the same kind of underwriting with the same kind of repayment options and the same kind of rules. Where they differ is the criteria they apply when it comes to eligibility and the amount of money that people can borrow for the mortgage. Buy to let mortgages differ from regular mortgages on criteria such as affordability because they are calculated not on how much an applicant can borrow or afford to pay back on their salary, but rather on what they can bring in as an investment and the viability of the property as an investment. Buy to let mortgages are also more regularly taken out as interest-only mortgages rather than repayment mortgages, thereby allowing the investor to either take the money as income or to repay the capital and then receive surplus rental income.

The Cost of Buy-To-Let Mortgages

Another difference in buy to let mortgages is that they can often cost more than regular mortgages and it is important for people to bare this in mind when calculating their potential profits and income streams. Buy to let mortgages cost more to set up, with both the set-up fees and the rates offered being significantly more expensive.

Loan to Value Ratio

They also require a higher Loan to Value ratio than standard high street mortgages. For a long time after the housing bubble burst and the credit crisis caused banks to tighten their criteria banks were asking for much larger deposits on all mortgages. Now however, the 95% mortgages are once again being offered (though still less often than before) and most people will be able to get a mortgage with a 10% or 15% deposit. Not so when it comes to buy to let. For investment mortgages such as these the banks ask for a minimum of 25% deposit. That means that a £200,000 house will require a minimum deposit of £50,000. This mortgage cap of 75% is often prohibitive for most people, but bearing in mind what happened with the housing bubble it is no bad thing. Putting a significant deposit down on a property normally means the investment has a better chance of working out as the smaller mortgage, the higher the profits will be from the rental income. Often the bank will also offer better rates to people who put larger deposits as their risks are greatly reduced. Finally, it is also worth noting that the government’s help to buy scheme expressly excludes people wanting money for buy to let mortgages.

Different Kinds of Buy-to-Let Mortgages

There are of course different types of buy to let mortgage that people can sign up to. Along with the difference between interest only and repayment mortgages mentioned above there are also the variations in rates that people can choose from, such as Fixed Rates or Tracker Rates. Which type of rate people choose often comes down to whether they want to take a slight gamble or whether they would rather have some security. Those people who favour security will inevitably opt for a fixed rate, (often for five years) so that they know exactly how much they need to pay back every month and they are secure in the knowledge that this will not change for the next few years. The rates may drop and they may lose out but on the other hand they may go up and their decision to fix the rates will then appear prudent. Tracker rates on the other hand are often priced a bit lower at the start, as the lender knows that if costs and rates increase later they will be able to pass on those extras to the borrower, which they cannot do with fixed rates. If the interest rates drop further, tracker mortgages will prove worthwhile. If, however they go up, then they will be more expensive than fixed rates. Mortgage rates are very low at the moment and may well be for the foreseeable future so it is potentially worth fixing them at the moment (though it is important to discuss this decision with a mortgage broker or financial advisor). Lenders are currently taking advantage of the government ‘funding for lending’ scheme that funds those institutions at a low .75% rate and this scheme lasts until mid way through 2015 so for now at least rates should remain low.

Do The Research

In then end, it is always worth doing a serious amount of research before committing to a buy-to-let mortgage and before deciding on which type of mortgage to opt for. This involves shopping around, doing your research in books and on financial forums and sitting down and comparing the various mortgages you come across. Some buy to let mortgages will look great but the small print will show they come with high fees or charge a percentage of the loan amount to set them up. If you have a larger mortgage you might be better with a fixed fee – if you are getting a smaller mortgage the percentage route might be better. Look out for deals on free legal services and free valuations that companies might be offering. Buy to let valuations can often cost significantly more than standard high street ones so deals that offer free valuations are worth considering. However, be cautious if they want to tie you into one legal firm or solicitor as they might in turn have much higher charges. In other words, when weighing all these things up, remember to consider all these factors and weigh up the whole deal, not just the bits on the brochure!

Remember to Talk to Your Accountant

Buying property to let out will of course affect your tax return in a number of ways so it is always worth discussing it with your accountant first. For more information about tax issues around buy to let, have a look at HMRC’s buy to let guide here. (https://www.gov.uk/renting-out-a-property/paying-tax)

Finally, Persevere

If you have been declined, remember there’s many lenders out there that have very different criteria and who may be able to offer you the mortgage you need. So don’t give up!

Fixed Rate Mortgages for Contractors

Introduction

The term ‘Fixed Rate Mortgage’ is self-explanatory – it refers to mortgages in which the interest rate stays fixed throughout an agreed term. They are a way for people to guarantee their mortgage payment remains the same for a specific period of time – anything from a year to 10 years (although most are for 5 years) – before the mortgage reverts to the Standard Variable rate at the end of that period. They are gaining in popularity at the moment (whilst the economy is still precarious and the housing market is starting to rise again) thanks to incredibly low rates of interest meaning there has never been a better time to get a mortgage. People who are desirous of stability and certainty in their mortgage would consider fixed mortgages at the current low-interest levels (some contractor mortgage companies are offering below 4%) to be a good bet. This is reflected in the number of people currently signing up to longer term fixed mortgages (between 5 and 10 years) which were previously not that common. Should everyone sign up to a fixed-term mortgage? Whilst no one can doubt the value and stability they offer (particularly at current rates) there are, as always, a couple of things to bear in mind before signing up:

The Advantages of Fixed Rate Mortgages

As mentioned above, the chief advantage of Fixed Rate Mortgages is stability. With the global economy still volatile and the UK economy still precarious, borrowers who wish to avoid their investments being troubled by the movements of the base rate of the Bank of England should sign up to fixed rates now. By taking out a Fixed Rate Mortgage a borrower is buying themselves interest rate security for the period that the rate is fixed. That security covers not just the knowledge that you will not have to deal with a massive jump in interest rates (and therefore increased monthly mortgage payments) but also the security of being able to make future plans based around a constant and unchanging figure in your personal outgoings column. In fact, fixing your rates often means that the only change you will notice is a positive one – in which your income improves over the years whilst the payment amount stays the same and therefore decreases in percentage terms. In short:

  •  You know precisely what your mortgage payment will be, for a precisely defined period.
  •  You know that if interest rates rise, your mortgage payment will stay the same.
  •  You know that your mortgage is your largest outgoing but you can also budget for that outgoing with certainty.

The Disadvantages of a Mortgage which has Fixed Rate

Obviously there are some potential downsides to fixed rate mortgages otherwise everyone would be using them all the time. The clearest and most common downside is the chance that no matter what rate you fix your mortgage at there will always be the possibility of rates actually dropping below your fixed rate. This would make your fixed rate look expensive and be immensely irritating at the very least. You always have to remember therefore that while you are immune from rises in the Bank of England base rate you also cannot benefit from any reductions. So, in the last couple of years, when the base rate sank to 0.5%, if you had fixed your rate a year or two before that you would have lost out. Secondly, remember that most fixed rates will tie you to that lender for the duration of the fixed period and that if you decide you need to change, for any reason, you would probably be penalised for doing so. Most fixed-term mortgages, particularly those with longer terms, will have heavy early repayment penalties that can be anything up to 7%. What that means is it becomes extremely uneconomical to remortgage in that time. Similarly, should you want to move home there is normally the ability for borrowers to move their mortgage but with fixed term mortgages there can be problems with such porting. Borrowers with these kinds of mortgage will find that porting will be permitted on the basis that the borrower must meet the new criteria put in place at the time the move is to happen. This can cause problems if the criteria have changed in the intervening years or the borrower has had some changes to their credit status. If they cannot meet the new changes they are stuck with the old mortgage and cannot move. With this in mind, many people are simply not prepared to be locked into a mortgage for such a long time. In short:

  1. Higher arrangement fees
  2. Should interest rates drop, your payments stay the same and you could end up paying above the current rate
  3. If you need to repay your mortgage before the end of the fixed term, you will be forced to pay an early repayment charge.
  4. At the end of the term, depending on interest rates at the time, you could face a massive jump in your monthly payments.

In Conclusion

It is possible to mitigate some of these disadvantages listed above – such as the jump at the end of the fixed rate period – by planning ahead and getting another fixed rate mortgage lined up. And as long as you know what you are committing to and are in for the long haul, then fixed rate mortgages make perfect sense. The risk of rates dropping lower is very minimal at the moment as rates are lower than they have been for many years and don’t look like they could go much lower. Indeed getting a mortgage fixed at current rates is probably a good thing for most people, with some mortgage companies offering interest rates below 4%.

How To Find The Best Umbrella Company

Thanks to the constant stream of legislation out of HMRC relating to the way contractors work there are now only two realistic options open to contractors for managing their income – working via their own limited company or working via an umbrella company. Both have their advantages. Limited company contractors who are directors of their own company have slightly more options when it comes to tax minimisation and expenses claims. They epitomise the ‘go it alone’ ethos of contracting that most people are looking for. However, they also end up facing an awful lot of paperwork and a great many complications when it comes to tax, intermediaries and IR35! Which is why more and more contractors are now turning to umbrella companies which still offer that ‘go it alone’ mentality but provide it under the cover of no paperwork and no hassles from HMRC!

Indeed, ever since legislation was introduced to crack down on most of the contractor earnings vehicles out there – such as Employee Benefit Trusts and Managed Service Companies – the numbers of contractors opting for umbrella companies has ballooned to the point where they seem to be the default choice. There are now more than 200,000 contractors working via umbrella companies and that figure is growing year on year.

But how should a contractor who is new to the sector go about choosing an umbrella company? Firstly, they should start by doing their research – asking around, looking through forums online, checking industry reviews, talking to contractor accountants and recruitment agencies. Next, they should be prepared to ignore any hype. Most umbrella companies offer the same kinds of service at the same kind of rates. If you see an umbrella company claiming to offer a load of additional services or extra reductions in tax then you should probably steer clear of that one! Under PAYE there is very little wriggle room when it comes to tax liability so they’re either exaggerating or doing something a little bit naughty! The same applies to any claims they may make about contractor expenses. In fact, the rules on expenses are very strict and getting stricter by the year. In the end, the best way to judge them will be whether they seem honourable and truthful, whether they offer good service and how they both charge their contractor fees and get contractors their money. With that in mind, the following are some suggestions as to how to choose one umbrella company over another:

Do They Charge Unusual Fees? What Kinds of Fees

You should make sure you don’t go near any umbrella companies that are charging entry fees to join them, exit fees to leave them or which come with a minimum term that you have to stay with them (and consequently penalise you if you leave early!)

How Do They Charge You For Their Service?

Most of the decent umbrella companies will charge a fixed fee for their service, so you need to avoid any companies that link their fee to your contracting rate. This can end up being very expensive as their fee will go up as you start to earn more. These sorts of umbrella companies have purposely put in place complicated fee structures to tie themselves to your contract values. But why should you end up paying more just because you start to earn more? They are not having to do any more work so they should not be getting any more money!

No Receipts, No Expenses

Don’t listen to any umbrella company that states it is ok for you to make expenses claims without any receipts. If HMRC investigated your tax return and you did not have those receipts, then any claims would be disallowed and you would be liable for the outstanding tax.

Go With Established Companies

It may seem like obvious advice but it is best to go with an umbrella company that has been around for a while. There are a lot of new companies springing up everywhere and they simply don’t have the track record yet. If they get in trouble and fold, they could take some of your money with them!

If Something Doesn’t Smell Right, Walk Away

As mentioned above, there are a lot of claims flying around on a lot of umbrella company websites. It is very difficult to tell if a company is honest or ethical just from their website and a quick chat on the phone. But as a rule of thumb, if they are promising something (be it expenses, less tax or anything else) and you find yourself wondering how they are doing that, then chances are you should walk away. Once again, all umbrella companies are operating under the same rules and regulations as set out by HM Revenue and Customs.

Do You Know If They Are Compliant?

Obviously, you need to find out if they themselves are compliant and if they have been externally audited or reviewed. This is now quite common so it is worth checking. They will naturally tell you they are compliant as they want your business. But it is worth asking them what all their marketing claims are built around and whether they have had any dealings with HMRC. And always keep in mind, if there are any problems down the line it will be you in trouble, not them!

How Is The Service?

Lastly, it’s all about the personal touch. There are, nowadays, a number of fully automated umbrella companies out there and they are definitely cheaper. But that doesn’t mean they’re better. At some point you will almost certainly want to speak to a human being, particularly if you are new to the contracting sector. Before you sign up, call them and test out their service. Try asking them a few questions like – Will I have a dedicated account manager? How big is the support team? Are there service level agreements? See if you get one competent person who can deal with your questions well and who listens to you. If not, move on to another umbrella company!

 

What should you expect from an Umbrella

An umbrella company helps you to increase your take-home pay while paying full income tax and staying under the law of UK. The umbrella solution becomes popular after the implementation of a new tax known as IR35 in 1999. Later changes in HMRC guidelines discouraged Managed Service Companies (MSC), which left contractors with only two choices i.e. an umbrella company or a limited company.

Due to the nature of limited companies, they don’t suit every contractor. Many contractors simply don’t want to get into the hassle of setting up a new company. Others don’t want to commit as a company directory but they still don’t want to go back to permanent employment. This is where umbrella companies come in. They offer a middle ground for contractors so that they can continue working without having to set up their own limited company.

Getting started with an umbrella company is easy. All you have to do is to sign a contract and your company will take care of rest of the things. But before you get started, here are some important things that you need to ask your umbrella service provider before making a contract.

Web-based platform

The very first thing you need to look for in an umbrella company is that can you access it by sitting anywhere in the world? Make sure that you can submit your timesheets online at any time, anywhere.

Payroll flexibility

How flexible is the umbrella service provider with their payroll? How long it will take to receive the payments after submitting the timesheets? Is it possible to get the payments twice a month? A reputable umbrella company will offer you to receive the payments on a monthly, weekly, or fortnightly basis so that you can select a plan according to your requirements.

Also, you have to make sure that you can ask for emergency payments in case you need your payments earlier than routine. There should be a way through you can get your payments quickly.

Insurance Cover

While making a decision about a PAYE umbrella company, you need to make sure that they offer personal liability insurance cover. The insurance cover makes your payments safe and secure in case your umbrella company goes bankrupt.

Claimable Expenses

The reason for joining an umbrella company is to increase your income by claiming true business expenses. An umbrella company allows you to claim travel expenses, equipment charges, lunch expenses, etc. You have to select a company that allows you to claim more expenses to enhance your earnings.

Fees and charges

It is important to look at service charges of the company before finalizing the deal. The top rated companies offer no signup or termination fee so that you don’t need to select a company that asks you to pay in advance. Also, there should be no charges for the period you are not working on any contract.

Another thing that you need to know is that some companies offer a variable fee structure. The cost of services you pay in this case increases when you earn more. Therefore, if your income rises, the umbrella company fee also raises. This can be a huge problem especially if you are looking to increase your take-home pay. A big chunk of your increased income will be deducted by your umbrella company as its fee.

Supplementary Fees

Some companies display low fees and charge to attract the contractors, but most of them make you pay more money through additional charges. Make sure that there are no additional charges for, reference letters, sending the invoices, issuing payslips, P60’s, etc. Make it clear that you will not pay any extra fees except the service charges. Some companies may charge you a fee for joining and leaving the company. Beware of any such fees.

Customer Support

Most of the companies offer 24/7 customer support so that you can ask for help in case of an emergency without having to restrict yourself to office hours. The customer support staff makes sure that you are receiving your payments on time and not facing any issue regarding your timesheets or payments. Also, there should be no extra charges for 24 hours customer support as it is part of their services.

Calculating how much you can borrow

Though it is best to use a mortgage calculator to get a guideline indication of how much you can borrow, you can also make the calculation manually if you are not near a computer.

For any individual who is looking to secure mortgage funding, the amount that you can typically borrow will vary from lender to lender and product to product, regardless of whether you are a contract, employed or self-employed worker.

As a general rule of thumb, you can typically borrow 4 times your gross regular annual income and where it’s a joint application the rule is 3.5 times the combined annual income.

Where one applicant’s income is significantly greater than the other it is also possible to base borrowing on three times the highest income plus the other income.

Calculation based on contracting income

The issue that many contractors have when they approach a mortgage lender is that lenders will usually fail to understand how the contractor is paid and as such will not take the contractors full earnings into consideration when reviewing their affordability for mortgage purposes.

Most contractors use one of many tax efficient methods to remunerate themselves, which can often mean that income can looks a lot less than it actually is when looked at from a high level. Lenders who are less flexible towards contractors will usually only take ‘conventional’ parts of contracting income such as salary and dividend draw into account when calculating how much they would be prepared to lend to you.

Our bespoke underwriting proposition offers a solution to any problems surrounding complexities in income, and allows contractors to maximise borrowing capacity when proving income. Essentially, contractors can annualise their daily rate so that full gross contract value is taken into consideration when assessing income.

The way in which a lender annualises your daily or hourly rate is usually dependent on the individual criteria of the banks and building societies. A general calculation is your daily rate x 5 x 46. Your daily rate will be multiplied by 5 as there are generally 5 working days in a week. Despite the 52 weeks in a year, the lender usually multiplies your weekly rate by a slightly lower multiple to account for holidays and sick days when you will not be paid. The multiples as mentioned above would then be applied to calculate how much the contractor can borrow.

An example of calculating borrowing capacity based on contracting income would be:

A contractor has a daily rate of £600. £600 x 5 = weekly rate of £3000. £3000 x 46 = annualised earning of £138000. This is then multiplied by 4 (again this would vary depending on the lender) to calculate the contractor’s borrowing capacity which is = £552,000. Therefore, based on their daily rate, the contractor should be able to borrow approximately £552,000, subject to their credit rating and lending criteria.

Next Steps

It is important to remember that the calculations mentioned in this article should only be used as a guideline amount. If you are looking for a more accurate indication of how much you can borrow, please contact us on 01489 555 080 to speak with one of our specialist contractor mortgage consultants directly. Our consultants will be able to apply their extensive knowledge of lending criteria to provide you with an accurate calculation of how much you can borrow based on a specific product or lender.