24 Feb SELF-EMPLOYED MORTGAGES: OUR HANDY GUIDE TO BORROWING WHEN YOU WORK FOR YOURSELF
As of November 2021, there were 4.2 million self-employed people in the UK, and many of them will think about owning their own homes at some point.
Mortgage lenders will consider you self-employed if you own at least 20-25% of a business, and when that business provides your primary source of income. Among the many different categories of self-employment, some of the most common include:
- sole traders
- directors of a limited company
- partners in a business
- agency workers
However, just because you have your own business doesn’t necessarily mean that lenders will consider you self-employed. If you’re in full or part-time employment and you also have an additional source of income from working for yourself, you’ll still be classed as employed if your regular job makes up your main income source.
Applying for self-employed mortgages does mean jumping through a few more hoops than other borrowers, and lenders will ask for detailed information about your finances and business. But fear not, because our handy guide is here to explain the process and light the way.
HOW DO SELF-EMPLOYED MORTGAGES WORK?
Although we’re using the term here for simplicity, there’s actually no such thing as a “self-employed mortgage”.. However, alongside the familiar names on the high street, there are some specialist lenders who concentrate on mortgages for the self-employed.
Before 2011, self-employed borrowers could self-certify their income. If your credit rating was strong enough, lenders would pretty much take your word for it if you couldn’t prove your income.
Unfortunately, these loans were abused by borrowers and lenders alike, leading to inappropriately high mortgages being given to people who couldn’t afford to repay them. Eventually, after the financial crash, self-certified mortgages were banned by the Financial Conduct Authority (FCA).
Today, although the application process is slightly longer and more involved, self-employed people can generally choose from the same range of mortgages as employed borrowers.
WHAT CRITERIA DO LENDERS FOR SELF-EMPLOYED BORROWERS?
When you’re employed, it’s easier for lenders to verify your income through payslips, P60s and contacting your employer. When you’re self-employed, you probably won’t have payslips. More than that, your income could well be less consistent than a regular monthly salary, so lenders ask for more detail.
Along with standard credit checks and confirming your identity and address, expect to be asked for the following when submitting your mortgage application:
- two or more years’ accounts (preferably certified by an accountant)
- SA302 forms or a tax year overview (from HMRC) for the past two or three years
- proof of any upcoming contracts (if you’re a contractor)
- evidence of dividend payments or retained profits (if you’re a company director)
- details of any personal borrowing like loans and credit cards
- a list of your monthly outgoings and commitments
- at least six months of bank statements going back from now
- confirmation of assets, including savings accounts and investments
- additional sources of income
- proof of current rent or mortgage payments
You may also be asked if you received any Government support during the pandemic and what happened in your business to need it. Some lenders will accept those payments towards your income, while others exclude them.
If the above sounds a little daunting, we’re here to help! Get in touch to talk about your business and which lending options are most suited to your circumstances.
ARE MORTGAGES FOR THE SELF-EMPLOYED MORE EXPENSIVE?
If the information you provide meets the criteria of a typical high street lender, you should be offered the same mortgage deal and interest rate as any conventionally employed borrower.
All lenders have their own preferences around their ideal customer, and some favour certain professions within the self-employed sector. To avoid making a wasted application, speak to an independent broker with experience of self-employed mortgages. They can steer you towards the most suitable lenders, saving you time, effort and disappointment.
Sometimes, your income, industry or other documentation won’t tick all the boxes of high street lenders. Fortunately, there are specialist lenders for self-employed mortgages who often take a more flexible view, although their interest rates and fees can be slightly higher.
Just with all mortgages, the amount of deposit you have will affect the offers available to you and who you can borrow from. Lenders see borrowers with larger deposits as less of a risk, and they reward that with better products like lower interest rates and longer fixed-rate terms.
HOW TO BOOST YOUR CHANCES OF GETTING A SELF-EMPLOYED MORTGAGE
If you’re not yet ready or eligible for a mortgage, you can still take steps to give yourself the best chance of being accepted whenever you decide to buy a home.
Take a look at the following to see if you can make any improvements:
- Think before you make that purchase. Legitimate business expenses are useful for reducing your tax bill, but a lower declared profit can affect how much you can borrow. If you have plans for major purchases (new computers or gadgets, office furniture, pricey software and tools), consider holding off until you’ve bought your new home.
- Work on your credit score. Even if you’ve never missed a payment in your life, having a high balance on your credit cards, large personal loans, or making too many credit applications in a short space of time can bring your score down. Reducing your debts and holding off any more credit applications will see your score increase, opening up more lenders and loans.
- Look at your bank account. If your statements show you constantly overdrawn, lenders will question your ability to manage your finances, so concentrate on staying in credit for six months before you apply. If you really can’t clear the overdraft, consider moving the balance to a credit card as these are looked upon more favourably by lenders. You might even find a card with a 0% interest rate, helping you pay off the balance sooner.
- Show evidence of savings. How will you meet your mortgage payments if your business hits a sticky patch? Can you show a cash reserve of a few months as a safety net?
- Get on the electoral roll. Not every lender requires you to be listed on the electoral roll, but having an active entry increases your credit score and adds an extra level of security in confirming your identity and address.
What’s next for you?
Self-employed mortgages might take a bit more work and time to arrange, but with the correct advice and identifying the right lender, they needn’t be hard to get.
Are you self-employed and thinking about buying a home? We’d love to help you get there and to hear about your plans. Call us on 01803 554455 or email us at [email protected] for some expert advice and a friendly ear.