There are more than five million self-employed people in the UK, according to the Office for National Statistics (ONS). Yet getting a mortgage when you work for yourself can be more complicated than if you’re an employee working for a company.
Here’s what you need to know.
Can I get a mortgage if I am self-employed?
You can get a mortgage if you work for yourself. However, lenders prefer job stability and the predictability that comes from a reliable income.
If your income tends to fluctuate from month to month – as it often does if you’re self-employed – lenders may be more nervous about letting you borrow. Because of this, you’re likely to need to provide more evidence of your income to get accepted for a mortgage.
How to apply for a self-employed mortgage
If you’re applying for a self-employed mortgage, you will need the following documents to prove your income:
- Two or more years of certified accounts
- SA302 forms or a tax year review from HMRC for the past two to three years
- Evidence of upcoming contracts if you’re a contractor
- Proof of dividend payments or retained profits if you’re a company director.
You’ll also need:
- Bank statements for the past three to six months
- Proof of ID, such as your passport or driving licence
- Proof of address, such as a council tax or utility bill.
Do your accounts have to be from an accountant?
Especially if your financial affairs are complicated, most lenders will insist that your accounts have been complied by a chartered or certified accountant (which means they are part of a professional body).
In any case, using one can only boost chances of being accepted for a mortgage.
Note however, that while many accountants will legally reduce your declared income so that you pay less tax, your accounts will show a smaller profit as a result, which could affect your affordability when it comes to a mortgage application.
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How does affordability work?
The introduction of the Mortgage Market Review (MMR) back in 2014 meant that lenders must now comprehensively check whether you can afford a mortgage, both now and in the future too.
As part of this assessment they will “stress test” your finances to see whether you would still be able to afford your mortgage if interest rates were to increase (to 3% above what the lender’s mortgage deal reverts to).
To ensure you won’t be overstretching yourself, lenders will look at both your income and how you spend your money.
Your bank statements will be examined to assess how much you spend on household bills, childcare costs and commuting. Lenders will also consider how much you spend on holidays, socialising and hobbies, as well as whether you have any debts to repay and how much these are.
Do all lenders want the same?
Although lenders must all follow the same rules, they won’t all have the same criteria.
This means that where one lender might turn you down, another might accept your application. For this reason, it’s important to check eligibility criteria carefully before applying.
You may also want to seek help from a mortgage broker.
Should you use a broker?
There’s no requirement to use a mortgage broker to help you with your mortgage search. But, especially when you are self-employed, it can help to ensure you’re matched with the most suitable lender and deal.
Brokers have inside knowledge of each lender’s criteria and preferences, which can ensure you don’t waste your time applying for a mortgage you have no chance of being accepted for.
Brokers will also manage your application and arrange the necessary paperwork, which can make the process much easier.
Many brokers do not charge the customer a fee for their services, taking their commission from mortgage lenders instead. However, check they are independent and have access to the whole of the mortgage market rather than just a selected panel of lenders.
How your self-employed mortgage will be assessed
If you’re self-employed, your situation will generally fall into one of three categories, and this will affect how you’re assessed.
- Sole traders – if you’re a sole trader, you will need to declare your income using self-assessment and have your tax calculated by HMRC. You’ll need to submit this on a SA302 form which lenders will use when calculating what you can borrow
- Partnership – if you’re in business with someone else, lenders will look at your individual share what profit it makes
- Limited company – as a director of a limited company, lenders will look at both your salary and dividend payments when it comes to affordability. But note that not all lenders will factor in profits to their calculations, should you choose to retain any
Is it gross or net income the lender looks at?
If you’re a sole trader or freelancer, lenders will usually look at your net profit over the past two to three years. An average is then taken from those figures.
For contractors, lenders may take an average of your income over the past few years, or your annualised day rate may be taken into account.
If you’re a limited company, lenders will look at your share of net profit or your salary and dividend payments.
What if your business has suffered because of Covid-19?
In the wake of the Covid-19 pandemic, many lenders have tightened their criteria even further.
As a result, you may be asked to provide details of your turnover for the past three months as well as historic accounts so that lenders can see exactly how your earnings have been affected.
Applications are usually looked at on a case-by-case basis, and some lenders may be more lenient than others. Using a broker may help you to find a lender that is more likely to accept your application.
Are the same mortgages available to the self-employed?
These days self-employed people can choose from the same mortgages as anyone else, so there’s no such thing as ‘self-employed mortgages’.
Traditionally, however, ‘self-certification’ or ‘self-cert’ mortgages were available. These were specifically designed for those unable to provide proof of their regular income, making them a popular choice for the self-employed.
The Financial Conduct Authority (FCA) banned self-cert mortgages in 2014 due to concerns borrowers were being approved for mortgages they couldn’t afford to repay.
Tips to boost your chances being accepted
There are several steps you can take to increase your chances of getting accepted for a self-employed mortgage:
- Save for a bigger deposit: As with any type of mortgage, the more you can save up for a deposit, the more likely you are to get accepted for a mortgage and secure the best interest rates
- Check and improve your credit score: Before applying for a mortgage, check your credit score by using one of the fee-free services available online. Lenders use your credit score to determine how reliable you are as a borrower, so the better it is the more likely you are to get accepted
- If your credit score is poor, take steps to improve it such as checking you’re on the electoral roll, paying bills on time, spacing out credit applications and correcting any mistakes on your credit report
- Get your paperwork in order: It’s important to ensure your accounts are up to date and have ideally been prepared by a qualified accountant before you apply. Ideally, you’ll need at least two years’ worth of accounts.
Frequently Asked Questions
Who counts as self-employed?
Generally, lenders will view you as self-employed if you own more than 20% to 25% of a business from which you earn your main income. You could be classed as a contractor, sole trader, or company director.
Is it harder to get a mortgage when you’re self-employed?
It can be. But providing you have sufficient proof of income, a good credit score and a large deposit, you should still have a good chance of getting accepted.
Do the self-employed pay higher mortgage rates?
Not necessarily. So long as you can provide adequate proof of your income, you should have access to the same mortgage rates as everyone else. You’re more likely to secure the best rates if you have a good credit history and large deposit.
If you’re struggling to get accepted by a mainstream bank, however, you may have to apply with a specialist lender which may charge higher rates.
What can I do if I don’t have two years of accounts?
You may find it harder to get a self-employed mortgage if you don’t have two years of accounts. But your application may still be considered by certain lenders, particularly if you can prove you have already received regular work or that you have regular work lined up in the future.
It’s worth speaking to a mortgage broker to see if they can advise on lenders that may be more willing to accept those newly self-employed. If not, you may need to approach a specialist lender.
Do self-certification mortgages still exist?
No – self-certification mortgages were banned from the UK market in 2014.
By Rachel Wait
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