Post-credit crunch, it has become trickier for self-employed workers, freelancers and contractors to get a mortgage – but it’s not impossible.
If you work for yourself, and are looking to remortgage or buy a new home, find out how you can get the right mortgage for your circumstances with this guide.
The past few years have seen it get more and more difficult for first-time buyers and existing homeowners to get a mortgage, but one group of home-buyers has suffered more than most: the self-employed.
Before the credit crunch in 2007, self-employed workers could apply for a “self-certification” or “self-cert” mortgage. With these loans, borrowers didn’t have to prove their income using bank statements or payslips; instead they simply told the mortgage lender what they earned. Applications were often “fast-tracked” through with no checks being made.
Although self-cert mortgages were aimed at freelancers, contractors, business owners and people with several strands of income, the loans were sold more widely. Abuse of the system led to self-cert mortgages being dubbed “liar loans” because people where exaggerating their income in order to secure a bigger mortgage.
As a result fast-track and self-cert mortgages were banned, making it now much more difficult – but not impossible – to get a mortgage if you’re self-employed.
There’s no such thing as a ‘self-employed mortgage’. You are going to get a normal mortgage, you just have to jump through more hoops to prove your income than someone who is on a company pay roll.
The key change for self-employed workers is the need to prove your income to any mortgage lender you apply to. Most will want to see at least two years’ accounts or tax returns. The more accounts you can show the better.
When lenders determine how much to lend to you, they generally base their calculations on your average profit in the past few years. Lenders prefer borrowers to employ an accountant to prepare self-employed workers’ accounts. Some lenders state the accountant must be certified or chartered – so bear this in mind when choosing one. You can find a local chartered accountant here. Make sure your accounts are up-to-date and in order before you apply – lenders aren’t impressed if they are presented with out-of-date figures.
If you don’t have two years’ accounts, don’t panic. Some mortgage lenders will still consider your application, especially if you can prove a track record of regular work, you have left employment to work as a contractor in the same industry, or you have evidence of work lined up for the future.
In other cases, if you already have a mortgage and want to remortgage to save money or move home, your existing lender may be able to help. They have a history with you, and know you meet your repayments so are far more likely to help than a lender who doesn’t know you.
As with any other borrower, it will massively increase your chances of being accepted for a mortgage if you have a decent deposit or chunk of equity in an existing property. Find out more about how a deposit can help, and how much you need, with our guide.
A squeaky clean credit record will also boost your chances of getting a mortgage. Find out more with our guide to understanding your credit rating and find out how to improve your credit rating. A lender won’t just credit check you, they will also credit check your business by running a check on your business address. So make sure that credit report is in the best possible shape too, sort out any unpaid or late debts and check the report yourself to make sure there aren’t any mistakes that could damage your chances of getting a mortgage.
When you set up your own business you have a choice of three main business structures to choose from. Which one you pick will influence how lenders view your income.
As the name suggests, sole traders are one-man bands. Keeping records and accounts is fairly straightforward – and you get to keep all the profits.
It’s these profits a lender will look at when assessing your income. If you do your tax by self-assessment and get HMRC to calculate it for you, you may get a form called an SA302, which shows the total income received and total tax due. Your lender may want to see this alongside your accounts, so dig it out and have it ready.
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner’s share of the profit. So, make sure you have accounts that show exactly how much money you made so your potential mortgage lender can easily see your annual income.
Setting up a limited company means 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. Make sure the lender takes both these elements of your income into consideration when assessing mortgage affordability.
In order to prove your income you will need to be able to provide your lender with at least two years of accounts. Get these put together by a chartered accountant so your lender can be confident they are accurate. But make sure you understand the figures and can talk the lender through them if asked. For example, if you have a dip in your income at a certain point, be able to explain what happened and why. If you can clearly explain fluctuations it is a lot more impressive than if you get flustered when questioned, and therefore increases your chances of getting a mortgage.
There are a couple of common problems you may come up against when proving your income. Firstly, in the past you, and your accountant, will probably have been keen to legally reduce taxable income in order to pay less tax. However, this could count against you when applying for a mortgage as suddenly you need to show the biggest income possible.
Secondly if you’re a director of a limited company, you might have profits that you choose to retain in the business, rather than take out as salary or dividends.
If you want to leave your deal early many lenders will penalise you. The penalty can by calculated in a variety of ways:
Some mortgage lenders consider retained profits when assessing an application, but some don’t. In some situations this can mean company directors find it more difficult to get a mortgage than their employees. A mortgage broker will be able to help you find a lender that will take retained profits into account. You can find a mortgage broker here.
If you are looking to borrow more than £500,000 ask your broker to look at mortgages offered by private banks such as Coutts or C. Hoare & Co. Private banks are more flexible about what they take into account when assessing income, for example they will include other assets and incomes.
It’s a good idea to take advice from both your accountant and a mortgage broker before you apply for a mortgage.
A mortgage broker is invaluable when you are self-employed. They’ll know which lenders are willing to lend to self-employed, which take retained profits into account, if any lenders will accept less than two years of accounts and, most importantly, who will offer you the best rate. You can find a list of reliable, good value brokers here.
If you don’t want to use a broker you can compare mortgages and find the lowest rates with our mortgage tables.