Posted 1 Jul 2019
After the financial crisis of 2007-2008, it has become more difficult for self-employed people to get a mortgage deal, as lenders are generally exercising more caution with who they offer mortgages to. That said, although it may be more difficult to secure a mortgage as a self-employed person, it is by no means impossible if you are properly prepared and can assure the lender that you are not a high risk borrower.
Before the financial crisis of 2007-2008, those who were self-employed could apply for a ‘self-certification mortgage’. With this type of mortgage, it wasn’t necessary for the borrower to prove their income using statements from their bank account or payslips. Few checks were made on this type of mortgage, and a self-employed person could simply tell a lender how much they earned, and could potentially give inaccurate, larger numbers if desired to secure a larger sum of money.
Nowadays, self-certification mortgages are non-existent and have been banned in the UK due to previous abuse of the system. Unfortunately, this history has made it more difficult for self-employed people to secure a mortgage in the present time.
How to get a self-employed mortgage
To successfully get a self-employed mortgage you need to prove to a mortgage lender that your income is stable enough to afford the regular repayments. Many lenders will want to view at least three years’ worth of your accounts and tax returns. The more evidence you can give them that your self-employed status is strong and a low-risk, the better. Here is a checklist you should give to a lender when applying for a self-employed mortgage:
- Three years’ worth of accounts and tax returns
- Evidence/contracts/emails that prove you have regular, ongoing and stable work
- A deposit of at least 10%
- A good credit rating
A lender will calculate how much they could lend you based on the above and your average profit over the last few years. It always helps if you can provide a lender with documents and accounts that have been carefully compiled by a certified or chartered accountant. If you have slumps in income, you will need to explain to a lender exactly why this happened. If fluctuations are clearly explained with evidence, there is no reason why a mortgage lender should dismiss your application.
If you are new to being self-employed and you don’t have three years’ worth of accounts, you may still be considered by a lender if you can demonstrate to them that you have plenty of work lined up and renewable or ongoing contracts. If you already have a mortgage and want to remortgage, it may be worth approaching your current lender, as you may have more success in securing a better deal with them (given your repayment history) than seeking a new deal from a different lender who doesn’t have these details.
If you have a large deposit to put down on a property and you are self-employed, this will greatly increase your chances of securing a deal with a lender, as they will favour offering you a smaller amount of money as a decreased ‘risk’.
It goes without saying that a positive credit history will also make it more likely for you to secure a self-employed mortgage. A lender will check your personal credit rating as well as a check on your business, so make sure that your debts and credit cards are paid off, and that you obtain a free credit score report so that you can take action to improve your score before applying for a mortgage.
Business infrastructure and self-employed mortgages
Did you know that the way your business is set up can affect your mortgage application? The structure of your business will play a role in how a lender assesses you.
If you are a sole trader, you only work for yourself and have no other employees or members of staff working for you. You keep all the profits associated with your business and do your own self-assessment tax form, which is what a lender will want to see in finer detail. If you have an SA302 form from HMRC that reveals the overall income you earned and tax due in a year, it is likely your lender will want to see this.
If you are in business with a partner, a lender will look at the percentage of the company that you own. You will need to show a lender accounts that reveal exactly how much profit you have made so that your annual income can be clearly determined.
A limited company will have multiple employees and a director that receives a salary alongside dividend income. The lender will need to assess both of these aspects of your income before making a decision on your self-employed mortgage application.
Proving your income
You may find it difficult to prove your income if you have an accountant that you are using to (legally) reduce the amount of tax you pay by reducing your taxable income. Mortgage lenders prefer borrowers to have the biggest income possible, so we advise that you contact your accountant before applying for a self-employed mortgage. Company directors may also find it more challenging to secure a mortgage deal, as retaining profits within a business can be considered by some lenders as a criteria to lend or not lend a person money.
Whatever your business and personal circumstances, if you’re looking for a self-employed mortgage, we can compare the market for you to find the best lender for your needs. Talk to us today about your business and mortgage requirements – our advice is impartial and completely free. Simply call or fill in our online enquiry form.