If you’re self employed, getting a mortgage agreed shouldn’t be a problem, it just involves some more work on your part, that’s all.
These days we all know the idea that the self-employed could just go out and get a ‘self-cert’ mortgage is a thing of the past.
These were somewhat abused prior to the 2007/08 financial crash which means now, those who work for themselves must go through more stringent procedures.
This doesn’t mean obtaining a self employed mortgage for an increasing number of the UK workforce should be a problem. Rest assured, it really isn’t. When it comes to mortgage lending, the theory goes that being self employed stands you with the same chance as anyone else i.e. you have the same mortgages actually being offered to you.
You know you’re able to afford the repayments on a mortgage, you’ve just got to convince your lender – so let’s get you some helpful tips and guidelines to help you out.
A Mortgage for the Self Employed
Just so we’re all clear, technically there is no “Self Employed Mortgage”product, it really is just a regular mortgage, except that it’s not quite as straightforward for the self employed.
Obtaining this sort of borrowing can just be more of a lengthy process over those on a company “PAYE” system – of course, it’s obvious why – payslips. They show the exact money you’re making monthly and annually, very clearly and distinctly.
So, although it would appear it’s definitely getting harder for first-time buyers to obtain a mortgage for buying their first property (house prices are rising and wages…not so much), it doesn’t mean it’s more challenging for the self employed. Some may have you believe this.
Whether you’re an existing self employed homeowner or a self employed first-time buyer, we can help point you in the right direction.
Proving Your Income – What Self Employed Workers Need to Apply for a Mortgage
Ok, let’s lay out some basic criteria for getting yourself a mortgage so that you can feel confident you know exactly what’s coming when your appointment with the mortgage advisor comes around!
You will need:
- A minimum of two years’ worth of accounts (tax returns) to prove your income over recent years – don’t worry if you don’t, all is not lost (more on this later)
- A Certified/Chartered Accountant to help you produce these accounts – some lenders INSIST your accountant is Certified or Chartered (take this into account beforehand)
- Have a consistent track record of regular work/income
- A positive credit history to boost your current financial status
Bear in mind, as you’d expect, mortgage lenders will base what profit you’ve made (i.e. after taxes) over the last couple of years to assess your eligibility and affordability when it comes to borrowing for purchasing a property.
If a lender is confidently able to see what you’ve earned in the last few years, it will make things easier for your assessment and what can be done about it, should there be some discrepancies.
Not Got 2 Years’ Worth of Accounts?
As we mentioned earlier, this shouldn’t be a problem as there are lenders out there (think “off the high street”) who will offer borrowing based on only one year of submitted accounts.
Between lenders, the criteria really can vary quite a bit – however, this is something we can help you with as there’s no “one fits all” mortgage criteria for purchasing a property.
Naturally, the longer you’ve been established as a business – whether that’s a Limited Company or Sole Trader, it’s always going to be more favourable in the eyes of the lender but this should not deter new freelancers and business startups!
Some Other Considerations…
- Your household spending – lenders want to know what your expenses are – bills, insurance policy payments, maintenance payments and things like this. Make sure you’re keeping tabs on your household budget.
- Obtain an SA302 form – this simply shows the lender the income you have declared to the taxman. You can request one yourself from HMRC (have your NI number and UTR reference to hand) or simply get your accountant to do this on your behalf – seeing as they’re preparing your annual accounts anyway!
If you “Minimise Your Earnings” You Won’t be Able to Borrow as Much
Why would anyone do this you’re possibly thinking?
Well, the main reason is to reduce one’s tax bill – not so sensible from a borrowing standpoint, because if your lender sees you’re earning less, it can negatively impact your ability to obtain a self employed mortgage.
Next then, one of your first questions will expectedly be “how much can I borrow?” A good question too.
This depends on various factors including how much profit you’re able to prove over the last few years and what size deposit you have sitting in the bank looking all healthy and smug.
Let’s not forget, we’re not aiming this at first-time buyers, because if you’re already well-established on the property ladder, you’ll be in a pretty good position, and that feels good. Your property going up in value (as a homeowner) works in your favour – it’s obvious, but let’s brush over this quickly.
Before looking to move home and therefore get yourself a new mortgage, if your home has increased in value your equity has gone up which means the capital you’ve built up acts as your “deposit”.
This looks favourable to your lender (new or existing) for pretty obvious reasons, so a word of advice is to get your home valued by three (at least two) local estate agents.
This gives you a good idea of what your property is worth and means you can ask about current property price trends in your local area.
Improving Your Credit Rating
It goes without saying, a good credit history is important when applying for a mortgage (especially as someone who’s self employed) but you need not worry – especially if you’re already on the property ladder.
If you’re not yet, then here are a couple of quick and easy tips:
- Pay off debts when they’re due. This proves your ability to pay off loans – always a good thing when applying for one! This could be phone bills, credit cards and anything of that nature.
- Secondly, ensure you’re on your local electoral register at your current address.
The Shape of Your Business Setup Can Have Different Implications on Your Mortgage Chances
Sole Traders –
For sole traders all lenders will look at your net income for the year (specifically the last two) so that’s actually quite straightforward in this sense.
When a partnership is formed, your lender will naturally look at each partner’s share of what profit they have made/taken in the financial years. Make sure your accounts reflect this accurately.
Limited Companies –
For Limited Companies, most lenders will take into account both your salary and dividends for the previous two years. An average will then be taken. Others will work on your net profit.
However, some lenders will work on your taxable profit, which can result in your ability to borrow a higher sum of money.
Remember, if you’re a company director you could have profits you decide to retain within the business. Seeing as “retained” profits aren’t paid as your salary would be, this could affect your borrowing potential – best to check this out with the lender AND your accountant.
What if you are a contractor?
In the past getting a mortgage when you worked on a freelance or contractor basis was notoriously difficult. Contractors don’t necessarily fit into the employed or self-employed categories and sit in a “grey area” in between the two.
However there are specialist lenders that can see the difference and will work with your contract rate. An independent mortgage broker will have access to these specialist lenders and can get you a mortgage of up to 5 x your annualised contract rate (based on 48 weeks).
Being Self Employed & Finding A Mortgage
Not only do you wish to know all the facts about what you need and requirements etc, where to actually find one is also a pretty big consideration!
The best place to look should be a local independent mortgage broker. They’ll have a good idea of which lenders are able to and also willing to lend mortgages to those who are self employed.
They’ll be able to provide you with really helpful advice to questions like:
- Who will lend me this kind of borrowing based on such a small deposit?
- My deposit’s looking pretty healthy BUT, I’m only just getting through my first year of being self employed?
- I’ve got a bad credit rating from my past and though I am financially secure, I’m worried this could affect my chances?
Let’s Put all this Into A Summary –
Looking around for mortgage advice when you’re self employed can be somewhat stressful and bouncing around sites giving you “advice” like “don’t do this” and “you’ll be lucky if…” can just put you off altogether.
Remember, banks and lenders aren’t there to put you off (they’re also not your friend either, let’s not get carried away) but they are a professional financial service to get the money you need to move home or buy your very first property! Happy days.
5 QUICK REMINDERS
- Keep your records up to date – this means ensuring your accountant has everything they need OR if you’re doing your tax using HMRC’s self-assessment, keep things in order (the more organised you are, the easier it is for your lender to see exactly that).
- Get yourself a Chartered or Certified Accountant – Always go for someone recommended by a friend, neighbour or local business. This will give you confidence right from the start.
- A Mortgage Broker Will Help You – This should be your first port of call.
- Consider Your Income – If you reduce your taxable income too much (so that you’re paying less tax) if could adversely affect your ability to borrow because the lender sees that you’re earning less and nothing else.
- It’s Possible – It’s always possible for self employed workers and business owner to obtain a mortgage – you’ve just got to meet the right criteria, which although can seem lengthy, will be worth it.
At Choice Financial Solutions we’re here to help, why not contact us or request a callback today and we’ll do our best to guide you to getting a self employed or contractor mortgage.