Will your holiday pay be treated as income for a mortgage application?
Applying and being accepted for a mortgage can be a nerve-wracking experience, but for non-PAYE workers, it can be trickier, particularly when it comes to the treatment of holiday pay. In one case, a worker’s holiday allowance wasn’t accepted, meaning their mortgage offer was reduced by £100,000.
If you’re a contractor or freelancer instead of an employed full- or part-time worker through the PAYE system, you’ll likely need to provide more evidence of your regular and/or guaranteed income.
Your worker status, contract terms and basic pay are all crucial details required by lenders when deciding whether to offer you a mortgage.
But, for contractors, there are lots of ways to work and you can be paid hourly, daily, weekly or with set fixed-term contracts. These can include holiday pay, or in some cases this can be in addition to your basic salary.
However, whether holiday pay is included as part of your income for a mortgage application depends on the lender, and the type of contract the worker has. Some mortgage providers will only accept holiday pay as income if it forms part of a worker’s basic salary.
In one case posted on Mumsnet, a worker on a fixed-term contract with a fixed day rate was also given a holiday allowance in addition to their standard salary.
When applying for a mortgage with Halifax, their holiday allowance wasn’t included which resulted in a £100,000 difference between the amount they were able to borrow.
Amanda Aumonier, head of mortgage operations at online mortgage broker Trussle, says: “When assessing contractors’ affordability, lenders generally use daily rate figures for affordability calculations.
“As long as the employment contract confirms the contractor is paid via a daily or hourly rate, the income can all be keyed as basic salary. Some lenders will only accept holiday pay if it forms part of basic pay and doesn’t inflate income.”
What kind of workers have a holiday pay contract?
Contract workers often have holiday pay contracts. This means they are paid with a set daily rate, and on top of this rate they are then paid a set amount for holiday days.
This can vary widely depending on the type of work, hours or days worked, and how the worker is paid. It may be the fact that the arrangement is directly organised with an employer or it could be via an agency or through an umbrella company, for example.
This is in contrast to PAYE workers who are generally paid a set annual amount, which has holiday pay included in it. For example, a worker may be on a salary of £35,000 which includes 20 days of paid annual leave.
Is it common for holiday pay to be excluded from income?
Excluding holiday pay – if it doesn’t form a worker’s basic salary – isn’t uncommon, especially for those who work as contractors.
Aumonier says: “This type of scenario is relatively common, just like any element of non-standard income, and there are certainly lenders that are willing to accept it.
“The longer the contractor or freelancer has been earning, the better, and providing a contract or other written confirmation of employment will help.
“However, unfortunately contractors are deemed riskier than other buyer demographics, so they won’t always have access to the full market or best rates.”
Why do mortgage lenders exclude holiday pay?
Mortgage providers look at several different things when deciding how much to lend, and whether they will approve a mortgage. This includes an applicant’s deposit, income, and credit score.
Income usually consists of their annual wage plus anywhere else they receive money from.
However, in some cases lenders won’t include holiday pay – usually if it’s not part of a worker’s contract, or their basic salary.
David Hollingworth, associate director of communications for L&C Mortgages, says: “Many lenders will look to use the income on a fixed-term contract to support the income level for the application as long as there’s adequate history of contracting and usually a minimum period remaining on the contract.
“In order to make things simpler, that will often see a lender use the day rate multiplied up over the course of a year.
“This allows lenders to hopefully simplify the approach to contractors and treat them as employed. However, depending on the situation it could result in a need to consider lenders more individually where there are other allowances that the borrower needs to rely on.”
Another reason why lenders may not take account of holiday pay is because they have no way of knowing if a contract worker will decide to take this pay, or to take the holiday days – and have a reduced income.
Rob Peters, principal at mortgage brokers, Simple Fast Mortgage, says: “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.”
What do the main mortgage providers say?
YourMoney.com contacted a number of mortgage providers to see how they treat contract workers when it comes to holiday pay. This is what they told us:
“The way in which holiday pay is treated as part of proof of income for a mortgage application will vary from one individual customer to another depending on their employment and income status.
“Most customers will seek the advice of a professional mortgage broker or financial adviser to ensure they are directed to the right mortgage product to accommodate their individual circumstances.
“All Barclays mortgage products are subject to affordability and verification checks, ensuring customers are able to afford the mortgage repayments. For customers with more complex working arrangements, their application is referred to a specialist underwriter team and is assessed on an individual basis.”
“For contractors income we have two options available to evidencing income to support the mortgage advance. The view is that holiday pay is not included within the contractor’s income, unless this is an agreed paid feature of the contract and the contract is received by us.
“The two options are: last two years earnings are evidenced to utilise either net profit or salary and dividend, depending upon self-employment classification or last three months payslips plus a copy of the contract or an employment reference.”
Halifax states in its policy documents that it accepts holiday pay as income only if it forms part of basic pay and doesn’t inflate income.
“There is no specific mention of holiday payments, for HSBC it is the length of time in current continuous service via contracts which is assessed as part of the application.
“For fixed-term contracts, applicants must have been working for a minimum of 12 months or more current continuous service in the same type of employment via contracts (including self employed contracts) or if they have not, a minimum of six months or more current continuous service via contracts (including self employed contracts), in the same type of employment with at least 12 months remaining on their current contract.”
“Metro Bank does include holiday pay when looking at mortgage applications from contractors, as long as the applicant can fulfil our other lending criteria.
“Applicants must have a minimum three month current contract and history of contracts of at least 12 months, with no more than six weeks of gaps in contracts. We also need three months of bank statements showing receipt of contract income at level keyed.
“A 12 month history is not required for applicants who can evidence 24 months of continuous history working within the same industry as evidenced by P60s.”
“Nationwide will consider holiday pay as basic income provided the income proofs confirm that holiday pay is a substitute for some or all of the regular basic income.”
“Where holiday pay is evidenced on the applicant’s payslip, we are able to take 65% of the payment towards affordability calculations. If it is shown as a deduction, we can look to exclude it in the same way as we exclude other additional payments.”
“We require the last three months of payslips to help calculate applicants’ affordability.”
“To simplify our approach for contractors, we look at overall income either using their last two years of tax calculations (if the customer is paying their own tax) or evidence of the income declared on their current contract combined with a 12 month contract history (where the employer pays their income tax).”
Your options if a provider won’t accept your holiday pay as income
Mortgage providers are more likely to take holiday pay if you can show evidence over time of the amount you receive and it’s written into your contract. This includes giving evidence of payslips often from the past six months or longer.
Peters adds: “Most mortgage lenders 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.”
However, the mortgage market is highly competitive and there are lots of providers to choose from.
If you’re a contract worker, and your holiday pay isn’t being taken into account by a mortgage provider, it’s worth finding one that will include it.
A specialist provider for contract workers may be your best bet, or a mortgage broker who can advise you on the lenders to approach for your personal situation.
Hollingworth adds: “Shopping around could help here and so it’s important to flag the detail clearly upfront so an adviser will be able to tailor the search more appropriately to the lender, taking account of the need to accept any holiday pay as income.”