Self-Employed Mortgages: An Overview
If you are currently a business owner, or you are self employed you may have heard that finding a mortgage can be difficult. The demand for self-employed mortgages is rising and obtaining a mortgage to buy the property of your dreams is very realistic, with the right evidence of affordability.
Lenders assess the affordability of anyone applying for a mortgage in the UK, and this is no different for those seeking out self-employed mortgages. They need to know that you can afford your mortgage, both now and in the future. They’ll look at your incoming wages, your outgoing payments and they look for evidence that these payments are possible. This is where most self-employed individuals get nervous! Finding the evidence of income and outgoings for the past two years is not always a simple procedure – especially if your lender asks you for three years of proof instead of two. With this proof, you can have the access you need to a range of mortgages that will suit your situation. Without that evidence, the options for a mortgage may be limited.
Are Self-Employed Mortgages Really Hard To Get?
Right now, more than 5 million people are self-employed in the UK* and this is a figure that is likely to grow in the next few years. If you are taking the step to become self-employed, you may have heard that it’s hard to get a mortgage. However, it’s not as hard as you think it may be. The key point for those who are self-employed is that proving their income is often difficult, and it’s this that feels hard to work with. When you are self-employed, your earnings can fluctuate and this is what is difficult to track. Getting the paperwork together is also a lengthy, time-consuming experience. Lenders have to be assured that you can earn enough money to not only pay the mortgage deposit but to sustain the mortgage for the years to come.
There is a range of checks and procedures to go through when self-employed, and the lender you choose may go through your income with a fine-toothed comb to ensure a rock-solid ability to repay the mortgage. Payments for a mortgage must be made on time and it can sometimes be more difficult to establish a stable income for someone self-employed. It’s things like this that your lender will look for when you are applying for a mortgage and it could affect your borrowing power, too. Speaking to the right mortgage broker will help you to better understand exactly what you need for your mortgage to be successful.
Proving Your Income
When you are looking for a self-employed mortgage, you should know that the longer you’ve been doing it, the easier it is to secure a mortgage. You will then have more history in your income to prove what you’ve been earning. You’ll have a better choice of lenders to speak to with two years of accounts, but three years of income proof is often better! Some lenders want to see income proof prepared by a certified accountant, and they often ask to see the income tax you’ve paid to HMRC.
If you don’t have two years of accounts, you might find it more difficult to get the right lender for you but it’s not an impossibility. The more evidence you have of a stable income, the better off you will be in the eyes of a mortgage lender.
What Is Your Business Status?
The way that you structure your business will count towards your mortgage application. If you are a sole trader or contractor, partner or company director, you’ll need to assess whether you are the owner of 20-25%+ of your business.
- A sole trader is often assessed differently because of income changes. If your income is going up, you may find that lenders might take the average income for the past two years. If it’s going down, they could take the latest figures.
- Contractors would have their daily rate multiplied by working days throughout the year. You may be asked for a years’ contract history and evidence of other contracts coming up.
- If you are a company director, then you could have your income assessed in one of two ways: income based on salary and dividends, or salary in addition to retained profit.
What Do I Need?
As opposed to a regular mortgage, someone applying for a self-employed mortgage will need to provide clear evidence of income as we’ve detailed above. There are no set borrowing criteria, as it varies from lender to lender and depends on the individual income of the self-employed applicant. The deposit and fees for a self-employed mortgage are no different from a regular mortgage. You will still need to find a deposit, home insurance and moving costs!
The way your mortgage is calculated is the same as other mortgages and it will vary depending on the type of business you have. Your net profit as a sole trader will be used as your income to determine what your mortgage should be. Limited company owners will find that lenders will look at their salary and dividends to make a decision on what you can borrow.
Things You Should Know
When you are applying for a self-employed mortgage, you need to put the following things in order before making an application:
- Records and accounts must be kept up to date
- Speak to a professional accountant who can prepare your tax return and your accounts
- Don’t panic about getting a good deal – until you speak to the professionals, there’s no need to worry
- Don’t minimise your current income. It may be tempting to do it for tax purposes but it can affect how much you can borrow for a mortgage, which will be something you want to avoid
With the right advice, you can be on your way to owning the home of your dreams.