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Why Contracting Is No Barrier To Getting A Mortgage

05 Apr 2022

Derek Smyth

Derek Smyth of BWTechnology talks with David O'Reilly of Fenero about how the myth of contracting being a barrier to getting a mortgage is untrue. David outlines the best way of successfully getting a mortage while being a contractor.

Derek Smyth, Associate Director of Brightwater Technology is in conversation with David O’Reilly of Fenero

Introduction

DS: Hi everyone, I’m Derek Smyth, an Associate Director with Brightwater. I work on the Information Technology team and I specialise in contract recruitment. I’m joined today by David O’Reilly. David is Tax Director and owner of Fenero. Fenero, as many of you will know, is one of the leading providers of tax information and payroll services to contractors in Ireland. David, good morning, thanks for joining me.

DOR: Thanks very much for having me. 

Are contractors at a disadvantage when it comes to applying for a mortgage?

DS: I wanted to have a quick conversation with you about mortgages for 2 reasons. The first is that mortgages and property are once again in the news and a lot of people I’m speaking to are hoping to buy a property at the moment. The second thing is one of the most common objections I hear from people who might otherwise consider a contract role is that they won’t, because they feel that as a contractor, they would be at a disadvantage when it comes to applying for a mortgage and potentially that it would mean that they would be rejected for a mortgage because they are not in a permanent role. That’s the thought process. Is that the reality from your point of view?

DOR: Ok, this is something that pops up all the time for us. We speak with a lot of people who are contracting and this question comes up all the time. The short answer is that, no, it’s not a disadvantage. Someone who is considering contracting and wants to get a mortgage in 2022, it’s not a disadvantage. I’m going to caveat that though. If they don’t get set up under the right structure, it can delay the process. It’s not a disadvantage but they have to get set up under the right solution.

The same rules apply, whether you’re self-employed, employed, a contractor or an employee, the banks apply the same rules. Banks love ticking boxes. They’re fantastic at ticking boxes so the best advice is to set yourself up, set the application up that’s going to tick all those boxes and get through smoothly.

For me, in the terms of benefits for someone who’s considering contracting and going for a mortgage, contractors get paid more money, more money is good for a deposit and it gives them a better loan to income ratio, both of which reduces the risk profile of the individual. Banks love giving out money and what they love even more is getting repaid. The best advice I can give to somebody is use a mortgage broker who has experience with applications from professional contractors. They’ll know how to set up the application that’s going to tick all the boxes for the (mortgage) application. 

How to avoid delays in the mortgage application process.

DOR: In terms of advice in how to avoid the delays, it’s all about the correct set up and using the correct set up. I have, when I talk to these individuals, I have three buckets.

(1)    Somebody who is contracting, they weren’t self-employed last year, they have no income tax return for last year so that person has to go to the umbrella employee because if they went for the umbrella director option, one of the boxes that the bank would like to tick is that of last year’s income tax return so they won’t have that for 2022 until 2023.

(2)    Bucket number 2 is someone who is contracting who wants to get their mortgage in 2022, but they were self-employed last year, maybe they had rental income or dividends or something like that. That person can go with the umbrella director option because they’ll have that income tax return so they can tick that box.

(3)    Bucket number 3 is if they want to set up their own personal service company. The bank is going to ask for a copy of 2 years’ accounts (you’ll get away with one) so that’s April/ May 2023 before they’ll be able to apply for the mortgage. So generally, what we say if you were thinking of setting up a personal service company and get a mortgage, we’d say “hold off, go with the umbrella company, get the mortgage, draw it down and then switch across to the personal service company”

DS: Excellent. 

Other issues of concern when applying for a mortgage

DS: David, if somebody has made the decision “ok I’m going to take a contract and I’m going to apply for a house or I want to apply for a mortgage” when they talk to somebody like you, you have those 3 buckets that you mentioned, you’re obviously going to give them advice to go into the appropriate one. Is there anything else that they need to think about? They’re thinking about taking a contract role, they have that concern, is there anything else that they need to think about.

DOR: Yes, when we’re talking to these individuals, the correct option is really important to set up. The next one is that you will have to suffer some short-term pain to get this application across the line. What I mean by that is contracting opens up tax planning opportunities that are produced by that person’s taxable income, forgo them until you draw down your mortgage. Push everything into your taxable salary, make yourself look as attractive as possible for the bank. All your pension stuff, all your tax planning, leave that until after your mortgage, push as much as you can into your taxable salary. Other than that, it’s the same as (a) permanent (job), clean bank accounts, no missed direct debits, savings going into a separate bank account, not going excessive on Just Eat or Deliveroo because banks take that into consideration, the advice would be the same.

DS: So pretty much the same process and those other little differences that you’ve mentioned can all be managed but they just need advice and need to be working with somebody. 

How does a company like Fenero help contractors? 

DS: In terms of Fenero, David, and your company, how can you help somebody through that process?

DOR: We help in three ways. The first one, we make sure that they’re set up on the correct structure for their life situation and when they want to get the mortgage, is it this year, next year or 2 years’ time. Then we help them fill out all their forms, the tax clearance, the salary certificate and things like that. The best way we can help them is put them in touch with a good mortgage broker so they’re not going to waste their time, they’re not going to waste the mortgage broker’s time, they’ll help them get their mortgage application across the line.

DS: Great stuff. David, I really appreciate your time because it’s such an important issue right now and I think it will be very helpful. If somebody wants more information, can they contact you directly?

DOR: Yes, absolutely. [email protected] or [email protected]

DS: We’ll put that information out through our social media channels as well. Thank you very much for your time. Equally if someone wants to get in touch with me for advice on IT contracting, please do, I’m happy to provide advice at any time. David, thank you for your time.

DOR: It’s been a pleasure. Thank you

 

 Derek Smyth, Associate Director of Brightwater Technology is in conversation with David O’Reilly of Fenero.