Getting a Mortgage When You’re Self-Employed
Written on 28 May 2019 by
Self-employed professionals have always been able to take out mortgages, but the irregularity of their pay has proven an issue for lenders in the past and made getting a mortgage when you’re self-employed – especially one at a competitive rate – more challenging.
However, the number of self-employed professionals is growing on a yearly basis and that’s not something lenders can ignore.
Between October and December 2018, the Office for National Statistics found the number of self-employed people increased by 63,000 when compared with the same period in 2017, to 4.84 million. That’s 14.8% of all working professionals in the UK.
Lenders have had no choice but to accommodate this demographic, or they risked losing out on an entire market.
In this blog we’ll answer all your self-employed mortgage questions. We’ll explain how self-employed mortgage applications differ, what you need to take out a mortgage and how this varies depending on the nature of your self-employment.
Is It More Difficult to Get a Mortgage When You're Self-Employed?
Taking out a mortgage when you’re self-employed involves more paperwork than if you’re a PAYE employed professional with a monthly salary, but the truth is - it’s really not that big of a deal anymore.
Lenders used to offer a specific type of mortgage underwriting process to self-employed people, which didn’t require that the borrower provide proof of income, like tax returns, audited accounts or bank statements. The mortgages that involved this process were called “self-certification mortgages”.
They proved unreliable and were withdrawn around 2008.
Now, no product exists specifically for self-employed professionals. There’s no such thing as a “self-employed mortgage”. You have access to exactly the same mortgages and the same underwriting processes as the PAYE employed - lenders just require certain different information about your earnings.
What Do You Need to Get a Mortgage?
When you’re self-employed, own your own business or are a contractor and you apply for a mortgage, you have to supply different paperwork to prove your income than an employed person. You may have to provide a little more than an employed person, for whom 3 months of payslips may be sufficient. Nonetheless, most documentation requests are not too onerous, regardless of whether you’re self-employed or not.
Below we explain how the minimum requirements vary depending on your type of self-employment.
Self-Employed and Business Owners
If you’re self-employed as a sole trader or a business owner, you’ll sometimes only need to provide the lender with as little as one year’s trading with one year’s accounts. It’s best that you have a qualified accountant, otherwise you may find your mortgage options restricted. If you do have one, it’s important you ensure they’re either a Chartered or Certified accountant.
Lenders will generally base their calculations on an average of the last 2 years of net profits before tax, but now quite a few can simply look at your most recent year’s net profit.
Contractors must provide lenders with a track record of past work as well as evidence of future work. If you’ve been contracting for less than one year then don’t worry – there are lenders in the market that take a less restrictive approach, especially if you can provide a track record of regular work in the same industry or role.
For example, a lender will still often take your application into consideration even if you left full-time employment to work as a contractor within the last year, but you have evidence of future work. This will often be via your current contract, especially if it has already been renewed once before.
If you have a mortgage already and you’re looking to remortgage, it’s worth approaching your existing lender before reaching out to new ones. They know your history which could work to your advantage. If they’re unable to help you, you still have the option of looking at other lenders.
Ways to Boost Your Application
Save a Healthy Deposit
There isn’t really any way around it. Having a large deposit will increase the likelihood that you’ll secure a mortgage. It’ll also help you secure a lower rate which could reduce your monthly repayments.
Build Up a Good Credit History
A clean credit history, as always, is pretty much essential. It indicates to the lender that you’re a reliable investment. It’s important to be aware that, as a business owner, the lender will credit check both your personal credit history as well as that of your business. It’s critical that you make sure your credit history is in the best shape possible.
You can check your credit history for free online. There are lots of options, but 3 of the most popular ways are through Experian, Equifax and Noddle. Checking your credit history gives you the opportunity to settle any unpaid or late debts before you apply for a mortgage.
How You Set Up Your Business Influences Your Mortgage
The way you set up your business will affect how a lender will view and assess you. We explain how below.
If you’re an individual then keeping organised records and accounts should be relatively straightforward, especially as you’re the one retaining all the profits.
If you do your tax by self-assessment and have HMRC calculate it for you, you may be able to access a form called an SA302. This shows the total income you’ve received from all sources and the total tax due. Your lender may want to see this form, sometimes alongside up to 3 years’ worth of accounts, so make sure you have everything ready when you start applying for a mortgage. You should also be aware that the lower your net profit, the lower the amount a lender can consider lending to you.
It’s important to note that the actual SA302 statements are now being replaced by 2 statements called “Tax Calculation” and “Tax Overview”. These can often be downloaded via your HMRC online account.
Perhaps you entered a partnership when you went into business with someone else. In this situation, lenders will look at your individual share of the profits from the company, not the overall profits. This means that, before you apply for a mortgage, you should make sure you have accounts which clearly show how much money you’ve made from the business as they’ll make it easier for the lender to see your annual income. Sometimes, underwriters also find a letter from the financial director or accountant explaining how things work helpful.
Many people choose to set up limited companies as they’re a way to keep your business separate from your personal affairs. You need at least one director at the helm of a limited company and, in some cases, a company secretary. Directors normally pay themselves a basic salary plus dividend payments. Some lenders will consider retained profits when they assess an application from a limited company director, but many won’t. This means that as a company director, you may find taking out a mortgage more difficult than your employees, unfair as that may seem.
It’s best to seek the advice of a mortgage broker if you find yourself in this situation. A broker can help find you a lender that’ll take both your “normal” basic salary plus dividend payments and possibly any retained profits into consideration when assessing your affordability.
Before You Apply
We always recommend seeking advice from your accountant as well as a mortgage broker before you submit a mortgage application
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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.