The freedom of being your own boss doesn’t have to get in the way of your dream of homeownership. You can still secure your dream home with a self-employed mortgage.
Mortgages for self-employed workers
Getting a mortgage when you are self-employed can be slightly trickier because you’ll need to prove you have a reliable income. It might involve more paperwork and a few extra hoops to jump, but it’s not impossible . Keep in mind you might struggle if:
- You have erratic income – for example, if business is slow or you decide to take time off. These months can bring down your average income, which can make the lender hesitant to give you a self-employed home loan.
- You’re on the border of ‘availability’ – this is where a lender fears that you might not be able to afford mortgage repayments if the interest were to increase by 1-3%. Most lenders will usually perform a stress test to see if you qualify for a self-employed mortgage.
- The lender isn’t convinced about your business’s long-term viability – your business might be making decent money, but a lender might still have doubts about its long-term prospects. It might be because of the sector you’re in or if you just started out.
What is a self-employed mortgage?
Ultimately, all you need is to prove to a lender that you are a safe investment. Then you'll be able to get a self-employed mortgage rate that you are sure you can afford. However, there’s no specific mortgage designed for self-employed people.
Initially, there used to be ‘self-certification mortgages or ‘self-certs’, which were designed for the self-employed. These types of mortgages allowed lenders to self-certify how much income they earned in a given year without providing evidence.
After the 2007-2008 credit crunch, the Financial Conduct Authority (FCA) began cracking down on self-certify mortgages, and completely banned them in 2014 due to concerns that lenders were supplying mortgages they couldn’t afford.
How do lenders define ‘self-employed’ when considering a mortgage application?
While the definition might vary from one lender to another, you’re typically considered self-employed if you own 20% or more of a business and are involved in the day-to-day running of that business. This means you work for yourself and are not an employee working for an employer. You might be a freelancer, contractor, sole trader, or company director. It doesn't matter which, as long as you own a stake in a business that's your main source of income.
Types of self-employed and how they're assessed
There are three main types of self-employment – the one that applies to you will determine how the lender assesses your self-employed mortgage application.
Sole Trader
If you are a sole trader, then you work on your own and for yourself. There's no one else to consider, and this means that once you've paid tax, you keep all the profits. So, firstly, you’ll use self-assessment to declare your income – which is a requirement every year. HMRC then uses this to calculate your tax. Once you – or your accountant – have done this, you need to request a SA302 form. This will show your exact income and what tax you pay on it. Lenders can then use this figure to determine your mortgage offer.
Partnership
A partnership is where you work with someone else. Perhaps you own half of the company and your business partner owns the other half. If this is the case, the mortgage lender won't look at it as a whole. They will only look at your individual profits.
Limited company
When you are self-employed, you have the option to set up as a limited company. This means you'll have your business accounts and personal accounts separate to each other. You are likely to be the director of the company and therefore pay yourself a salary and dividends rather than taking the whole profit. Lenders will take all this into account. They will also consider profits in the business if you own more than 20% of the shares in the company.
Freelancer
Freelancing is the most common form of self-employment. It refers to any professional who provides a service based on their expertise and technical skills and isn’t contractually committed to any employer. They can work on multiple clients at a time and have multiple sources of income (although this may vary from one client to another).
Part-time workers
In some cases, part-time workers like seasonal staff and alternative schedule workers may be classified as self-employed especially if they have other supplemental income jobs.
What do I need when applying for a mortgage?
There are a few things you will need to be able to show when getting a mortgage while self-employed, these are:
Two years' accounts
You can get your tax calculations and tax year overview for the last two years by printing an SA302 form from your HMRC online account. This shows lenders that you can afford to make payments. If you can only account for one year, you might find it harder to prove to a lender that you can meet their requirements.
An accountant
Having a qualified, chartered accountant working on your accounts convinces lenders that the information provided is reliable, accurate, and meets self-employed mortgage requirements.
Regular work
You’ll need to be able to show lenders that you have regular work coming in. Unlike those working for an employer, there is a chance you may go periods without work. If you can prove as self-employed borrower that your work is steady, you shouldn't have an issue.
A deposit (5-20%, the higher, the better)
Of course, you need your deposit before applying for a mortgage. It may be tempting to start the process as soon as you have the minimum. But it’s worth saving for a little longer if you can. It will be easier to get a self-employed mortgage, and you’ll get a better rate. This is particularly beneficial if you are self-employed so you can show lenders you're able to afford it.
Good credit history
It’s important to have a good credit history whether you are self-employed or not. You can check your credit rating through a credit reference agency and look to improve it before applying for a self-employed mortgage. There are various ways to do this, including checking for errors and ensuring you’re on the electoral roll.
As well as showing the above, you’ll need to expand on each as proof that you can afford to make payments and that your finances are in good shape. It’s also worth showing that you can save – so that if you have a period with no work, you can use your savings to make payments. You’ll also need to provide:
- Passport
- Driving license
- Council tax bill
- Utility bills dated within three months
- Evidence of any savings accounts
- Proof of retainer profits (for a company director) or dividend payments
- Proof of upcoming contracts
- Six months’ worth of bank statements
This will prove your identity and your current living arrangements, as well as showing how you are spending your money.
How much will I get when applying for a mortgage as self-employed?
The maximum self-employed home loan you can borrow may vary from one lender to another. Lenders will typically apply an income multiple to the average of your earnings over a period of two or three years. Keep in mind that this income may be calculated differently depending on what type of self-employed trader you are.
Most lenders usually allow you to borrow up to 95% of the property’s value, or up to 4.5 times your salary. There are some lenders who can offer up to five times your salary, but most prefer to settle on 3.5 multiple for self-employed applicants.
Find out more about improving your credit score with our Know How blog.
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