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Self-Employed Mortgages (Part 1)

Gary Clarke talks to us about mortgages for the self-employed. Episode one of two, recorded in September 2024.

Is it hard to get a mortgage if you are self-employed?

There really isn’t anything challenging about being self-employed. It’s simply a case of making sure you provide the right proof of income.

For example, if you are self-employed as a sole trader, you’ll typically need to provide your last two years’ tax calculations and overviews.

If you’re a limited company or a partnership, potentially you’ll need to provide full company accounts to support that. As long as we could prove what your income is, there should be no problems in getting a mortgage when you’re self-employed.

What type of mortgage can I get if I am self-employed? Can I get a 95% mortgage if I’m self-employed?

Yes, you could get a mortgage with 95% Loan to Value. As with all mortgage applications, it comes down to what lenders are available and what your background and credit profile looks like.

Ultimately if that’s all fine, and there’s a lender that will lend you the amount of money you need based on a 5% deposit, it’s no problem at all.

There isn’t a specific type of mortgage for the self-employed. It’s just a straightforward mortgage.

How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?

The typical minimum is one year, and quite a lot of lenders require two years. Whilst there are some small exceptions that would allow less than one year, they are quite rare.

So as an absolute minimum, we recommend one year’s accounts. But if you’re really looking to get the right choice of lenders, try to have two years if you could.

 

My most recent year’s earnings were less than my average. Will this affect my mortgage application?

Ultimately, it depends on how each individual lender is calculating your income. If we’ve got an average of two years where the most recent year is lower, typically the lender would work on the lower of those two figures. If it’s increasing over the two years, they would use an average.

Declining profit is not necessarily a problem on its own, but the bank might want an explanation as to why your profit was lower in the most recent year. It could be something quite simple, such as investment into the company.

You might, for example, have bought additional equipment as a one-off expense, and that affected your profit for that year. Alternatively, it could be indicative of a wider trend.

The bank just wants to be sure they’re lending you the right amount of money for your circumstances, and you’re not going to get into trouble with paying your mortgage.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage if I’m self-employed?

How much you could borrow will depend entirely upon how lenders calculate your income, using one of many methods. Typically, standard income multipliers will apply.

The minimum is four and a half times income, and some lenders will go as far as six times. How they look at your income will help us decide which lender is available – and of course each one looks at things in a different way.

I appreciate that’s not really a straight answer – but as always, the more information we have, the more likely we are to be able to help you.

What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?

Typically, at the moment you would need a 5% deposit. Some quite unusual schemes offer 0% deposit, but they’re not usually appropriate for most people’s circumstances. We could certainly have a chat with you about what they might be.

In terms of being able to use the self-employed grant, this probably harks back to Covid times. Lenders will have different opinions on whether you could use those grants, but they would have been paid a couple of years ago.

So if the money’s still with you, it could be considered savings, especially if you’ve taken that money out of the business and put it to one side.

What are self-certification mortgages? Do they still exist?

With a self-certification mortgage, you would tell the lender what you earn and they would simply believe you. Times have moved on – I haven’t seen self-certification mortgages since the time of the financial crash, around 2007 and 2008.

These days, unfortunately, you have to provide proof of what you declare your income to be. That really is universal. There are no exceptions to that rule.

How will I be assessed as a self-employed mortgage applicant?

It depends on how you are self-employed – within a partnership, as a sole trader, or in a limited company. If it’s a partnership, your income will depend on your share of that partnership and how much income you take from that company.

If you’re a sole trader, it’ll be a case of looking at your net profit. That’s essentially your turnover less your expenses – that’s the figure you would be assessed on, whether you pay income tax or not.

For a limited company it’s a little bit more complex. Most lenders will take into account your director’s remuneration and then, depending on the lender, they would either use the dividend figure you pay yourself or your net profit. If they use net profit, some use it before tax and others after tax.

So there are some reasonably complicated ways of being assessed. The right thing to do is just come to us, tell us everything that you know about your self-employment, and let us do the hard yards for you.

Will IR 35 affect my mortgage application?

Not directly, but indirectly, as it depends whether you’re considered as an employee or self-employed. It depends whether you are technically an employee, a day rate contractor or you’re set up as a limited company.

As with all things, tell us as much as you know and then we’ll sit down and work out what the right option is for you.

 

How will a lender calculate my self-employed mortgage earnings?

Knowledge is power as I often say. The more we know, the better we’re able to help.

If you’re a sole trader, you’re going to be assessed based on your net profits. If you’re a partnership you’re going to be assessed on your share of the profits; and if you’re a limited company they’re going to look at your director’s salary, along with either your dividends or your net profit.

How do I prove my income? What documents do I need to apply for a self-employed mortgage?

Preparation is crucial for a mortgage application of any kind. For a sole trader, make sure that you have two years’ tax calculations and the matching overviews prepared in advance of your mortgage application.

It will help us assess your income and work out what the maximum loan is. With the paperwork in place, we’re using accurate figures that we could physically prove to a lender.

With partnerships and with limited companies, you’d often need to provide your company accounts alongside those tax calculations and overviews. Some lenders might just work on one or the other, but having everything available gives us the opportunity to assess what’s going on in the background.

We could also look at how different lenders will assess you. One lender might be offering a more generous affordability assessment, but we won’t just automatically go to that lender. We’ll go to the cheapest lender that will offer you the amount you need. The more paperwork you have, the better, as we could then assess where to place your mortgage.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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Self-Employed Mortgages (Part 2)

We continue the conversation on mortgages for the self-employed with Gary Clarke. Episode two of two, recorded in September 2024.

Do self-employed people have to pay higher mortgage rates?

No, as long as the affordability is met, you’ll be getting the same rates as everybody else. You don’t have to pay extra just because you’re self-employed.

Can I get a joint mortgage with a self-employed worker?

Absolutely, you could. Each person will be assessed on their income individually. Everything that we mentioned previously about how you’re set up as a self-employed person and the paperwork requirements would be exactly the same.

Your incomes will be combined on a joint application to create an overall income for the case. That total income goes towards assessing your mortgage affordability.

I’ve recently gone from being employed to self-employed. How soon until I can get a mortgage?

This comes up quite a lot. Typically, you need one year’s accounts if you’re self-employed. But some lenders might look at what you were doing previously as well as what you’re doing now, and if we could evidence that the income is continuous at the same level, they may consider that.

That’s not the case for every lender, and sometimes that could be a bit complex. So, typically we’d recommend a minimum of one year, and ideally two years.

Can I get a guarantor mortgage if I’m self-employed?

Guarantor mortgages don’t really exist in the traditional way anymore. If you want a guarantor, you would now either purchase jointly with another person or use an approach called Joint Borrower Sole Proprietor.

Here, you could have more than one person on the mortgage but just one individual on the deeds. You could also have three or four people on the mortgage and two people on the deeds.

It’s a way to get a boost to your affordability without the joint borrower’s home ownership status being taken into account – which helps with stamp duty. If someone’s already a homeowner, they would have to pay enhanced stamp duty on a second residential property.

Joint Borrower Sole Proprietor could be a great way of getting around that additional liability. It’s not for everyone, and requires specialist advice, but it could boost affordability – which is largely what a guarantor mortgage sets out to do.

Can I use shared ownership if I’m self-employed?

Absolutely yes. With shared ownership, there’s an additional affordability assessment that housing associations ask you to undertake. They work the same if you’re self-employed as for a standard mortgage application.

As long as you meet the affordability guidelines, based on the income in your application, you’ll be able to buy a shared ownership property.

Can I get a Buy to Let mortgage if I’m self-employed?

Buy to Let mortgages, as we know, are used when you’re purchasing a property solely for the purpose of letting it out. Most lenders for Buy to Let mortgages have a minimum income criteria. That minimum income is often £25,000, and as long as your provable self-employed income is above that level, you’ll be able to carry on as normal with a Buy to Let purchase.

How does remortgaging work if I’m self-employed?

You would apply exactly the same way as any other applicant. The lender will assess your income in all the ways that we’ve discussed, and ultimately, the affordability for that remortgage will come down to what we are able to declare as your income.

Will being self-employed with bad credit affect my mortgage deposit?

Bad credit will potentially affect anybody’s mortgage deposit, regardless of whether they’re self-employed. With bad credit, it comes down to what’s been registered, when, how much it was, whether it’s settled and when that happened.

Ultimately, being self-employed makes no difference to that, but the bad credit may mean you need to put down a bigger deposit. Depending on those circumstances, you might be considered as a higher risk.

So, you might need a larger deposit, or potentially you could pay a slightly higher rate, but that’s not really to do with being self-employed. That’s just the bad credit side of that equation.

How can I get a mortgage as the director of a limited company?

I think what people want to know is how income is assessed for a limited company director. Often people think that as a limited company director, they’re employed by their own company, which is largely true.

However, what we need to consider is the shareholding you have in that company. Typically, if your shareholding is above 20%, you would be considered under self-employed rules rather than as an employee.

If your shareholding is below 20%, there’s a very good chance lenders would consider you as an employee and take your salary into account for affordability.

That does change from lender to lender so it’s not a hard and fast rule, but that’s typically where the line is drawn.

Is there anything else I can do to help my chances of getting a mortgage as someone who is self-employed?

A lot of the standard things around improving your mortgage chances are the same for self-employed people. Make sure that you’re registered on the voter’s roll where you live, as that allows lenders to track you electronically and prove your identity a little more easily.

Make sure you’ve got your recent bank statements and they show good conduct – they are up to date with no missed direct debits, and you’re not going over any overdraft limits, for example.

Make sure your ID and proof of address – usually your passport or driving licence – are correct and in date. Keep hold of regular utility bills or your council tax bill to prove where you live.

Last of all, and I can’t stress this one enough, is making sure that you’ve got that proof of income ready. People usually have an idea of what their income is, but sometimes the way that income is worked out by your accountants can be a bit different.

Giving us access to that paperwork means we could assess your income correctly and find you the right option for you to get a mortgage. Ultimately all these things give you the chance of that mortgage going through to a successful completion.

It only benefits anybody if it completes. If it doesn’t, we’ve wasted our time and your time, the builder or seller hasn’t benefited, and the solicitors would also have worked for no good reason. So we need to make sure we get those bits of preparation right.

How can a mortgage broker help me with my self-employed mortgage application?

As with all things, clarity and information are key. The better prepared we are, the better the chance we have not just of getting not just a mortgage, but the right mortgage at the right possible value.

Ultimately, value isn’t just about lowest rates. It’s also about the fees charged in the background. One of the things we are really keen on is that when we say you can do something, you’re going to be able to do it.

There are myriad lenders out there with lots of different criteria and the average man or woman on the street is not going to know all of that criteria intimately.

I’m not saying we’re perfect, but we do know it a lot better. We have a really good idea of where we can go in unique circumstances, and give you the chance of finding the right mortgage. That’s the real benefit of an advisor – plus we’ll go do those hard yards for you.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

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