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Self-employed mortgages

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Written by Sarah Guershon

Since the demise of self-certification loans, there’s no such thing as a ‘self-employed mortgage’.

Sole traders, contractors and company directors have access to the same range of mortgages as everyone else. The difference is that if you are one of the five-million-or-so self-employed people in the UK, lenders will look at your finances more closely before agreeing to lend to you.

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

Yes. Sole traders, contractors and company directors have access to the same mortgages as everyone else.

The same mortgages are available to the employed and self-employed. The mortgage application process may be longer because lenders require additional proof of income.

You should not be penalised for being self-employed or charged a higher interest rate. The interest rate is based on the size of your deposit and your affordability.

Just as if you were an employee, you’ll get the best rates if:

  • Your finances are in order

  • You are on the electoral roll

  • You can afford to pay back any credit cards or loans

  • You are free from bankruptcies, county court judgments (CCJs) and defaulted payments

But the mortgage application process may be longer because lenders require additional documentation for self-employed mortgage applicants.

Your overall affordability is closely examined, which can make it tougher to get your mortgage approved. It can be even more difficult for those who have been self-employed for less than two years or have earnings that fluctuate.

How lenders assess self-employed income

Lenders now have very strict criteria when they work out what you can afford. Many of them require statements from the past two or three years.

However, they may base your affordability on just your most recent year of trading if your net profit is significantly lower than in previous years.

Lenders will pay close attention to your:

  • Business structure – are you a sole trader, limited company or partnership?

  • Income

  • Salary or dividends

  • Net profit

Net profit is the money left over after all your expenses have been paid. It is different from revenue/turnover, which is the net sales generated by a business.

Your company or freelance accounts must be verified by an accountant. Lenders do not accept them without this.

Many lenders base their assessments on average annual living costs and your disposable income above that figure. They may also take into account business assets, savings and investments, and ask you to put these down as part of your deposit.

Outstanding credit such as personal loans, car finance agreements and credit card debt will lower the amount a lender gives you.

Things get more complicated with incorporated companies. This is because some profit is retained within the company while the rest is paid as a salary or dividends. Some lenders take this retained profit into account while others assess affordability based on your salary and dividends.

Make your finances more attractive to lenders

The longer you have been self-employed, the better your chances of getting a mortgage, although that doesn’t mean the newly self-employed cannot get a loan.

Precise financial records will help your case. Show you have a steady stream of income and do not live beyond your means.

You’ll need a deposit of at least 5% giving you access to 95% loan-to-value (LTV) mortgages. As with all mortgage applicants, the bigger your deposit, the lower the interest rates.

Try to keep your outgoings modest for the six months before you apply for a loan. Avoid buying any big-ticket items, reduce spending on luxuries, and try to live within your means.

Pitfalls faced by the self-employed

Sole traders and freelancers often present their accounts in the most tax-efficient way possible. You do this by offsetting a lot of expenses against the business. So, while turnover may be reasonably high, net profit is low.

Lenders look at your net profit when deciding if to lend to you and how much. The lower your net profit, the less you will be able to borrow. The reverse of this is also true: the higher your net profit, the more you can borrow…but then you will need to pay more tax.

Similarly, paying yourself minimal dividends from a new limited company will impact on your ability to get a loan.

This is why some people believe you cannot get a mortgage if you are self-employed.

So you need to decide what will cost you least overall – more tax or a higher mortgage interest rate.

How to speed up the process

Thanks to the additional financial details that lenders require from the self-employed, the application process can take a while.

Here’s what you can do to speed it up:

  • File your company accounts early. You need to be able to show the last two years’ worth of fully verified accounts. The more detail, the better.

  • Have your tax information to hand. You can get an overview of up to four years’ worth of self-employed earnings by asking HMRC for your SA302 evidence of earnings. Access your most recent self-assessment details by logging on to your online account.

  • Show your invoice history. If you work for an umbrella company or a freelance agency, you’ll need to show proper records of all past payments.

  • Get hard copies of bank statements. Your lender will want to look at your outstanding financial commitments and how you manage your money on a monthly basis.

Self-certification mortgages

Self-certification (‘self-cert’) mortgages permitted borrowers to apply for a mortgage without having to prove their income. The borrower could certify what they earned themselves.

But the Financial Services Authority (FSA), which was the regulator at the time, banned self-certs after the 2008 financial crisis, deeming them too risky for borrowers. The fear was people were borrowing more than they could afford to repay, or even lying about their income.

Self-cert mortgages were popular with the newly self-employed because they allowed for minimal evidence of verified accounts. They were also used by people with a low base salary and uncertain additional earnings, such as commission or bonuses.