How to get a mortgage when you’re self-employed
Posted on 28 April 2017 by
The mortgage market for those who are self-employed or a contractor has grown to the point where last year 120,000 new loans were taken out by those who are self-employed – an increase of 11% on 2015. In the same period loans for those who are employed grew by just 6%.
But isn’t it more difficult to get a mortgage when you're self-employed?
In recent years’, lenders have become more cautious about how much and to whom they are willing to lend. Before the financial crash in 2008, self-employed workers could apply for “self-certification” or “self-cert” mortgages where no proof of income such as tax returns, audited accounts or bank statements were required. However, the system was abused and as a result fast-track and self-cert mortgages were banned. Since then it’s become a lot harder for the self-employed, freelancers and contractors to get a mortgage. The good news is, it’s not impossible!
What do you need to get a mortgage?
The most recent figures from the Office for National Statistic figures show that the total number of self-employed people is now 4.78 million or 15% of all people in work. With so many potential borrowers, you’d think that lenders would be falling over themselves to offer more self-employed mortgages, however, it’s important to understand that there is no such thing as a ‘self-employed’ mortgage.
When you are self-employed and you apply for a mortgage, you’ll be applying for a normal mortgage, however because you own your own business, you’re a contractor or are self-employed you’ll have to provide significantly more paperwork to prove your income – so you’ll need to make sure you have your accounts and tax return at the ready.
As a minimum, you’ll need:
- Self Employed/Business Owner: As little as one year’s trading with one year’s accounts. You won’t necessarily need to have an accountant but if you don’t have one, it may restrict your mortgage options. If you do decide to employ an accountant, make sure they are either a Chartered or Certified accountant. Generally, lenders will base their calculations on your most recent years’ net profit or an average over the period of two years.
- Contractor: A track record of past work with a likelihood of future work. If you’ve been contracting for less than a year then don’t panic! There are lenders in the market who offer a less restrictive approach, especially if you can prove a track record of regular work in the same industry or role. So, for example if you’ve left full-time employment to work as a contractor and you have evidence of future work, it will help to boost your application. If you already have a mortgage and you’re looking to remortgage, it would be a good idea to start with your existing lender as they’re in the best position to know your history but if they’re unable to help, don’t worry, there will be other lenders that will consider your application.
- A healthy deposit: There’s no escaping the fact that your chances of getting a mortgage will increase significantly by having a large deposit. It will also help you secure a lower rate and therefore it could reduce your monthly repayments.
- A good credit history: A clean credit history will boost your chances of getting a mortgage. Be aware however that as a business owner, the lender will credit check both you and your business so it’s important to make sure your credit history is in as good a shape as possible. You can actually check it yourself, for free. So ensure any unpaid or late debts are settled.
Your business set-up will also influence your chances of getting a mortgage
How you set up your business will affect how a lender will view and assess you:
- Sole trader: If you’re a one-man band keeping records and accounts will be relatively straightforward – especially as you’ll be keeping all the profits. If you do your tax by self-assessment and get HMRC to calculate it for you, you may get a form called an SA302. This shows the total income received and the total tax due. Your lender may want to see this alongside your accounts, so make sure have this ready when applying. It’s important to be aware that the lower your net profit, the less a lender will be prepared to lend you.
- Partnership: If you’ve gone in to business with someone else, you might have set up a partnership. When looking at your income, mortgage lenders will look at your individual share of the profits. It’s therefore important to make sure you have accounts that show exactly how much money you made so that a mortgage lender can see your annual income.
- Limited company: Setting up a limited company means that you keep your business separate from your personal affairs. A limited company will have at least one director and, in some cases, a company secretary. Directors normally pay themselves a basic salary plus dividend payments. Some mortgage lenders will consider retained profits when assessing an application of this sort, but some wont. That can mean that company directors can find it more difficult to get a mortgage than their employees. If you find yourself in this situation a good mortgage broker can help ensure the lender takes both these elements of your income into consideration when assessing mortgage affordability.
Applying for a mortgage
Before applying for any mortgage it’s important to get advice from both your accountant and a mortgage broker. A mortgage broker is invaluable when applying for any mortgage but especially when you are self-employed. They’ll understand the lenders that are willing to lend to self-employed clients, which lenders will include retained profits which will accept less than two years of accounts. And most importantly of all they will be able to help you find the best deal. Getting a mortgage when you’re self-employed can be trickier, but as we said at the start, it’s not impossible especially if you have the right accountant and mortgage broker working together for you.
For more information on self-employed mortgages or to speak with a mortgage broker submit an enquiry here or call: 0344 346 3672
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.