Self-Employed Mortgages
Many people believe that they will struggle to get a mortgage due to their self-employed status. It’s true that the high street lenders do prefer customers that are in stable full-time employment as it is much easier to define their income.
But there are still plenty of great deals to be found for the estimated 4 million self-employed people in the UK.
What makes someone self employed?
There are a few different types of self-employment, these mainly come from how mortgage lenders assess a person’s status and income.
HMRC (the tax man) will consider you self employed if you work for yourself, conduct business with different customers and you are responsible for your business activities, paying income tax and record keeping. This is typically known as a sole-trader.
Depending on their profession, some sole-traders will prefer to call themselves a freelancer. While freelancers do take on contract work for companies and organisations, they are ultimately self-employed.
If you are a business owner then lenders will see you as self-employed if you own more than 20-25% of that business. At this level of ownership you have control and influence on how the business runs and the activities it undertakes.
Typically the self-employed fall into one of five categories:
Sole traders
If you are a sole trader, you will be asked by lenders to declare your full income using a tax assessment return, known as the SA302 form. Using this, the HMRC will calculate your tax, and lenders will determine your suitability for a mortgage.
You will need at least 12 months of trading history to get accepted for a mortgage, with most providers wanting to see the last three years.
As a sole trader, you will find that specialist lenders are much more flexible and will be in the position to offer you better mortgage rates.
Partnerships
If you own a business with a partner, lenders will assess your individual ownership in the business in relation to the business’s profits. They will also access your self-assessment tax form as above.
As a general rule, you need to be able to show proof of income for at least 12 months of trading if you want to be approved for a mortgage as a partnership business. However, many lenders will ask for between 2-3 years’ worth of accounts. Therefore, you should be prepared for the latter to be asked of you, just in case.
Limited companies
If you own a limited company, you are classed as both a business owner and an employee. As a limited company director this means that you probably allocate yourself a yearly PAYE salary and also declare variable dividend payments based on how much profit the company makes.
In this case, lenders will consider both your salary and your dividend payments when making their decision.
Again, ideally, you should have been trading for over three years if you want to be accepted for a mortgage, but some lenders will consider less. A little research into which lenders will consider those with shorter business lifespans will save you from application rejections.
If you tend not to take the full dividend possible each year then you will have built up some retained profit within your business. There are some lenders that understand this scenario better than others in terms of utilising it for the mortgage affordability calculations.
Contractors
If you are a contractor, most lenders will analyse your total contract value or your day rate. If it is the latter, they will times your day rate by five days a week and the number of weeks you have worked to determine your income.
However, some lenders look at contractors as directors of a self-employed limited company.
Lenders may still lend to contractors even if: They have gaps between contracts, Have contracts with a value under £50,000, Do not have a contract end date as long as you have a 12-month record.
You will find more useful information in our guide to contractor mortgages and Mortgages for IT contractors.
Freelancers
Freelancers often fall between employed and self employed status. This can make the mortgage process a little more confusing. As a freelancer, you are likely to be hired to work for different companies on specific jobs, and there are currently over 2 million freelancers in the UK.
As your income is likely to fluctuate from month to month, a lender will focus on your latest income and the way that you freelance. If you have no or little work coming in, you are unlikely to be approved. However, if you can prove that your income is stable and that you can afford the repayments, you should be able to get a good deal.
Most lenders will want three years’ worth of income history, but some may consider less. If you already have contracts in place for future work, this can significantly help to boost your application.
If you haven’t, ask the companies you are freelancing for if it is possible to get one in place. Bear in mind, though, that it might take some time for this to happen, as you need the business to trust in you. Providing high-quality work and delivering work on time should be your focus.
Subcontractors are in reality freelancers, as they can choose who to work for. Those subcontractors who work in construction could be eligible for a CIS mortgage which uses their CIS vouchers as employee payslips, with lending based on the gross earned income.
Mortgages for professionals
Securing a mortgage can be a challenging process, but if you are a professional with qualifications and a stable income, you could be eligible for mortgages designed specifically for certain occupations.
Typically, this includes solicitors, accountants, doctors, and others who are viewed as having stable, high-earning professions.
Your status as a professional may grant you access to exclusive rates or bespoke deals that general mortgage products don’t offer.
Finding the right lender
High Street lenders prefer situations that are straightforward and low risk. For example: a self-employed plumber who has been working for themselves for 10 years and has accounts and bank records.
They would struggle with: a self-employed plumber who has been working for themselves for 1 year, who also has four investment properties generating income and owns a 50% share in another business that supplies bathroom fittings to the trade which was set up 3 years ago and has retained profits.
Lender’s are improving their understanding of how self-employed people and entrepreneurs operate, as more and more of us take on additional roles and start businesses for flexible extra earnings.
But for now the best option is to allow an independent mortgage broker (who are often self-employed themselves) to understand and assess your situation before finding the best lender for you.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Self-employed mortgages explained
You may be surprised to learn that a ‘self-employed mortgage’ does not exist!
It’s true that self employed applicants are subject to different rules regarding how they prove their income, but the range of interest rates and options is the same as for any other borrower.
For an employed person, paid via PAYE, the lender can easily see set amounts of money being deposited into their account each and every month. They will have payslips and P60 to backup these payments.
However, the situation is not quite as straightforward for the self-employed or shareholding company directors.
First off, lenders will work from provable historic earnings, over the last 2-3 years, rather than what you have been earning more recently. This will require you to provide:
- Sole-trader or company accounts
- SA302
- Personal and/or business bank statements
Ideally, these should cover the last three years and show a stable or rising income position. Most lenders will take the average of these figures to determine the maximum possible mortgage they could offer you.
The key to being successful is in two parts: Get your paperwork and accounts information in order, Get yourself a good mortgage broker who is experienced with self-employed individuals.
You will find more useful information in our article: Is a self-employed mortgage based on gross or net profit?
Are self-cert mortgages still available?
Self-certification mortgages were seen as being high risk, because borrowers could essentially state their income without any proof. There were concerns that people were overstating their earnings in order to secure a larger loan and it led to a lot of fraud.
For genuine borrowers with multiple sources of income, the self-cert mortgage did make it simpler and easier to apply for a mortgage.
But the financial crisis of 2007-2008 caused a review of mortgage practises and self certification mortgages were deemed too risky, and subsequently banned.
Nowadays, you’ll always need to provide proof of your income when you apply for a mortgage.
Improve your chances of success
Get organised. Being organised with your finances and paperwork will always improve your chances of mortgage success.
Here are our top tips:
Speak to a mortgage broker
As early in the process as possible find an independent mortgage broker that is experienced with self-employment. Brokers aren’t just there to find you a mortgage. Given enough warning they will be able to make suggestions, get your finances in order and prepare you for when you need to apply for a mortgage. Be honest with your broker, they will always help you present your application to a lender in the best possible way. Brokers will know the lenders that are sympathetic to borrowers who may not have a perfect set of accounts. Let us find a broker for you.
Check your credit status
Your mortgage adviser will be able to help with this. It’s important to know that your credit profile is in good shape and that there is nothing showing that will cause a lender to dig deeper. You can check your credit file here.
Review your spending habits
Lenders will ask for copies of your bank statements, so they will be able to see the takeaways, online shopping and streaming services you pay for. It will help your application if these can be trimmed back a bit. Maxed out credit cards and payday loans are a no, no.
Have a healthy deposit
A higher deposit from you means a lower level of risk for the lender. This makes them happy and you will lower your monthly repayments.
Sort your accounts
Having the most recent set of accounts ready will help you. So don’t delay, send everything off to your accountant asap after the end of the tax year in April.
Give yourself enough time
Where possible, plan at least six months in advance. This gives you, and your broker, time to get everything shipshape.
How to prove your income
You will need to provide official evidence of your declared income, this is normally via personal or business accounts and SA302 forms.
ACCOUNTS
If you are running your own business, partnership or limited company all lenders will ask to see your official accounts. These will have been drawn up by an accountant and show earnings, expenses and profit.
As a minimum, you should be able to provide two years of consecutive accounts which show stable or increasing earnings. Three years is even better.
SA302
An SA302 is the official HMRC year end Tax Calculation that is based on your submitted self assessment information (your tax return).
If you are self-employed or a company director then you most likely need to submit a tax return every year that includes all of your income. The SA302 provides a convenient summary that is accepted by lenders as proof of your earnings.
Using an independent mortgage broker
An experienced whole of market mortgage broker can help with your mortgage needs in a few different ways. The right broker will have useful knowledge concerning which lenders are more willing to approve people who are self-employed, as well as those that offer the best rates.
Many of these lenders are specialists who do not have a presence on the high street. and often do not even deal direct with borrowers.
A broker will obviously find you the best mortgage that they can, but they can also help you plan for your new mortgage and get your finances in to better shape.
For the self-employed time is money. Our brokers do charge a fee for arranging mortgages but this is paid back a few times over when you consider how much of the work they can take away from you. Leaving you to do what you do best.
