Mortgages when self-employed

In the ever-evolving landscape of entrepreneurship and the gig economy, a growing number of individuals are embracing the flexibility and autonomy that self-employment offers. While this career path comes with numerous advantages, it can also present unique challenges when it comes to securing a mortgage. For those seeking to navigate the home-buying process as self-employed individuals, understanding the ins and outs of the mortgage application process is essential. In this article, we will delve into the world of mortgages when self-employed, exploring the complexities, requirements, and strategies to increase your chances of securing a mortgage and turning your dream home into a reality.

How do you get a self-employed mortgage?

A self-employed mortgage is not a specific type of loan. You will apply for mortgages just like everyone else. Getting a self-employed mortgage in the UK can be more challenging than for those in traditional employment due to the perceived higher risk by lenders. However, it’s still very possible if you follow the right steps and provide the required documentation. Here’s a step-by-step guide to help you secure a self-employed mortgage:

Organise your finances: Keep clear and accurate records of your income and expenses. You may need to provide proof of your income, tax returns, and profit and loss accounts. Hiring an accountant to help manage your financial records can be helpful.

Check your credit score: A good credit score will help you secure better mortgage deals. You can use online services like Experian, Equifax, or TransUnion to check your credit score. Ensure there are no errors on your report and take steps to improve your credit rating, such as paying off outstanding debts and avoiding late payments.

Prepare the required documentation: Lenders typically require at least two years of accounts or tax returns (SA302s) to assess your self-employed income. The more years of records you can provide, the better your chances of approval. Make sure your records are up-to-date and accurate.
Determine your affordability: Lenders will assess your affordability based on your income and outgoings. Use online mortgage calculators to estimate how much you can afford to borrow based on your income, expenses, and deposit.

Save for a deposit: A larger deposit will increase your chances of securing a mortgage and may help you access better interest rates. Aim for at least 10% of the property value, although a 20% deposit or higher is more favourable.

Speak to a mortgage broker: A mortgage broker with experience in self-employed mortgages can help you navigate the process and find the most suitable deals for your circumstances. They will have access to a wide range of lenders and can advise you on your options.

Compare mortgage deals: Research and compare different mortgage deals to find the best rates and terms for your situation. Consider factors such as interest rates, fees, and flexibility when comparing mortgages.

Apply for the mortgage: Once you have found a suitable mortgage deal, submit your application along with the required documentation. The lender will assess your application and may request additional information or documentation before approving the mortgage.

Get a mortgage agreement in principle: Before you start property hunting, obtain a mortgage agreement in principle (AIP) from your chosen lender. This is a conditional offer that gives you an idea of how much you may be able to borrow.

Find a property and complete the process: Once your mortgage application is approved, find a property within your budget, make an offer, and complete the legal and conveyancing processes. After completion, you will be able to move into your new home.

How much can you borrow as a self-employed person?

The amount you can borrow as a self-employed person for a mortgage in the UK depends on various factors, including your income, credit score, deposit size, and the lender’s criteria. Generally, lenders calculate the amount you can borrow based on a multiple of your annual income.

Here are some factors that affect how much you can borrow:

Income: Lenders typically use your average income over the last two to three years, as shown on your tax returns (SA302s) or accounts, to determine your borrowing capacity. Some lenders may consider only one year of income if you have a strong financial profile.

Income multiples: Mortgage providers usually offer loans ranging between 3 to 5 times your annual income. However, this multiple can vary depending on the lender’s policies and your financial situation. If you have a strong financial profile, you may be able to secure a higher income multiple.

Affordability assessment: Lenders will assess your affordability by considering your income, expenses, and existing financial commitments. They may also stress-test your ability to repay the mortgage if interest rates increase.

Deposit size: A larger deposit can increase the amount you can borrow, as it reduces the loan-to-value (LTV) ratio. A lower LTV is less risky for lenders, which may result in a higher borrowing capacity.

Credit score: A good credit score can positively impact your borrowing capacity, as it demonstrates your ability to manage debt responsibly.

To get an idea of how much you can borrow as a self-employed person, you can use online mortgage calculators or consult with a mortgage broker experienced in self-employed mortgages. Remember that these calculations are only an estimate, and the actual amount you can borrow will depend on the lender’s assessment of your financial situation.

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

Self-employed people do not inherently have to pay higher mortgage rates. However, the rates offered to you will depend on various factors, including your credit score, income stability, deposit size, and the lender’s assessment of your risk profile.

If you have a stable income, a good credit score, and a sizeable deposit, you may be able to secure a competitive mortgage rate, similar to someone in traditional employment. However, if your income is irregular or difficult to verify, or you have a less-than-ideal credit score, lenders might perceive you as a higher risk, potentially leading to higher mortgage rates.

What documents or what will I need to provide for a self-employed mortgage?

When applying for a self-employed mortgage, lenders require specific documents to assess your income, financial stability, and ability to repay the mortgage. Here’s a list of documents you may need to provide when applying for a self-employed mortgage:

Income documentation:

a. At least two years of certified accounts, tax returns (SA302s), and a tax year overview from HMRC. Some lenders may consider only one year of records if you have a strong financial profile.

b. If you are a director of a limited company, you may need to provide both your salary and dividend payments.

Bank statements: Lenders typically require three to six months of personal and business bank statements to assess your income and expenses.

Proof of identity: A valid passport, driving licence, or other government-issued photo identification.

Proof of address: A utility bill, council tax statement, or bank statement (dated within the last three months) showing your current address.

Credit report: Some lenders may request a copy of your credit report to evaluate your creditworthiness.

Business details: If you’re a company director or in a partnership, you may need to provide details about your business, such as the company registration number and address.
Deposit proof: Evidence of the source of funds for your deposit, such as savings or a gift from a family member.

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

When calculating your self-employed mortgage earnings, lenders will typically look at your income over the past two to three years to establish a consistent income level. The approach may vary depending on the lender and your business structure (sole trader, limited company director, or partnership). Here’s how lenders generally calculate self-employed mortgage earnings for different business structures:

Sole trader: Lenders will look at your net profit (income minus expenses) as reported on your tax returns (SA302s) or self-assessment tax calculations. They will typically average the net profit over the past two to three years to determine a stable income figure.

Limited company director: If you’re a director of a limited company, lenders will consider your salary and dividends. They’ll assess your share of the company’s net profit and any dividends you’ve received, as shown in your tax returns or certified accounts. Some lenders may also consider retained profits within the company when calculating your earnings.

Partnership: For partnerships, lenders will evaluate your share of the net profit, as reported on your tax returns or certified accounts. Similar to sole traders, they will average your net profit over the past two to three years to establish a consistent income figure.

While the above methods are common, it’s important to note that different lenders have different criteria for assessing self-employed income. Some lenders may be more flexible or consider additional factors, such as recent business performance or industry trends. To better understand how a specific lender may calculate your self-employed mortgage earnings, consider consulting with a mortgage broker experienced in self-employed mortgages. They can guide you through the process and help you find lenders that cater to your specific circumstances.

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

Yes, you can get a joint mortgage with a self-employed worker. In a joint mortgage application, both applicants’ income, credit history, and financial circumstances are considered when assessing eligibility and affordability. As long as the self-employed applicant meets the lender’s requirements and can provide the necessary documentation, you can apply for a joint mortgage together.

How long do you have to be self-employed to get a mortgage?

In general, most lenders require self-employed applicants to have a minimum of two years of trading history to qualify for a mortgage. This is because lenders prefer borrowers with a stable and consistent income, which can be demonstrated through two or more years of tax returns or certified accounts.

However, some lenders may consider applicants with only one year of self-employed history if they have a strong financial profile, such as a high credit score, a significant deposit, or a history of regular, stable income in the same industry before becoming self-employed.

What if I only have accounts for one year or less?

If you only have accounts for one year or less, securing a mortgage as a self-employed person can be more challenging, but it’s not impossible. Some lenders may still consider your application if you have a strong financial profile and can demonstrate a history of stable income in the same industry before becoming self-employed.

Work with a mortgage broker experienced in self-employed mortgages to help you navigate the application process and find lenders that cater to your specific circumstances.

How to find the best mortgage deals for the self-employed

To find the best mortgage deals for self-employed individuals, consider the following steps:
Research and compare: Start by researching various lenders and mortgage products, including banks, building societies, and specialist lenders. Compare interest rates, fees, loan terms, and features to identify suitable options for your needs.

Consult a mortgage broker: Working with a mortgage broker experienced in self-employed mortgages can be invaluable. They can help you navigate the application process, provide personalised advice, and find suitable lenders and mortgage deals based on your unique circumstances. Mortgage brokers have access to a wider range of products and may have access to exclusive deals not available to the general public.

Check eligibility criteria: Review the eligibility criteria for each lender and mortgage product to ensure you meet their requirements, such as trading history, income documentation, deposit size, and credit score.

Consider flexible lenders: Some lenders may have more flexible criteria for self-employed borrowers, such as accepting a shorter trading history or alternative income documentation. These lenders may offer better deals for your specific situation.

Review product features: Look for mortgage products with features that suit your needs, such as the ability to make overpayments, payment holidays, or flexible repayment options.
Improve your financial profile: Strengthen your financial position by maintaining a good credit score, saving for a larger deposit, reducing debt, and keeping accurate financial records. This can help you access better mortgage deals and lower interest rates.

Negotiate: Don’t hesitate to negotiate with lenders or ask your mortgage broker to negotiate on your behalf. You might be able to secure a better interest rate or lower fees by discussing your options with the lender.

Is it hard to get a self-employed mortgage?

Getting a self-employed mortgage can be more challenging compared to a mortgage for a salaried applicant, but it’s not impossible. The main hurdles for self-employed individuals stem from the need to prove a stable and consistent income and meeting the lender’s specific requirements.

Despite these challenges, self-employed individuals can improve their chances of securing a mortgage by maintaining accurate financial records, having a good credit score, saving for a larger deposit, and working with a mortgage broker experienced in self-employed mortgages. By understanding the unique requirements and challenges of self-employed mortgages, you can better prepare for a successful application.

How do self-employed mortgages work, and how will you be assessed as a self-employed mortgage applicant?

Self-employed mortgages work similarly to traditional mortgages, but the application process and income assessment for self-employed borrowers can be more complex. As a self-employed mortgage applicant, lenders will assess your eligibility and affordability based on several factors, which may include:

Trading history: Lenders generally prefer self-employed applicants with a minimum of two years of trading history, as it demonstrates financial stability and consistent income. Some lenders may consider applicants with only one year of trading history if they have a strong financial profile.

Income documentation: You’ll need to provide certified accounts or tax returns (SA302s) / tax overview for the past two to three years to verify your income. Lenders will assess your income based on the business structure (sole trader, limited company director, or partnership).

Affordability assessment: Lenders will evaluate your ability to afford the mortgage based on your income, expenses, and existing financial commitments. They may take a more conservative approach when estimating a self-employed applicant’s future income due to potential fluctuations.

Credit score: A good credit score is essential for securing a mortgage at a competitive rate. Make sure you maintain a healthy credit history by making timely payments, avoiding excessive debt, and regularly checking your credit report for errors.

Deposit size: A larger deposit can make you a more attractive borrower and increase your chances of approval. Aim to save at least 10% of the property value, although a 20% deposit or higher is more favourable.

Business structure: Lenders may have different requirements and assessment criteria based on your business structure, such as sole trader, limited company, or partnership. Be prepared to provide the necessary documentation according to your business structure.

Stability and industry experience: If you have prior experience working in the same industry before becoming self-employed, this can demonstrate stability and increase your chances of approval.

What counts as “self-employment” when applying for a mortgage?

When applying for a mortgage, self-employment typically refers to individuals who generate income through their own businesses or freelance work rather than receiving a salary from an employer. Self-employed individuals can operate under various business structures, such as sole traders, limited company directors, or partnerships. Here’s a brief overview of these structures:

Sole trader: A sole trader is an individual who runs a business as a self-employed person and is solely responsible for the business’s profits and losses. They report their income through self-assessment tax returns and pay tax on their net profit.

Limited company director: A limited company is a separate legal entity from its owners (shareholders) and directors. Directors may receive a salary and dividends from the company’s profits. When applying for a mortgage, lenders often consider both the director’s salary and dividends as their income.

Partnership: A partnership involves two or more individuals sharing the profits and losses of a business. Partners report their share of the business’s income through self-assessment tax returns and pay tax on their share of the net profit.

How are self-employed mortgages different to standard mortgages?

Self-employed mortgages are not a separate product, but the application process and requirements for self-employed individuals can differ from those for salaried applicants. Here are some key differences between self-employed mortgages and standard mortgages:

Income documentation: Self-employed applicants need to provide proof of their income through certified accounts or tax returns (SA302s), typically for at least two years, while salaried applicants usually provide payslips and bank statements to verify their income.
Income assessment: Lenders assess self-employed income differently based on the applicant’s business structure, such as sole trader, limited company director, or partnership. They may consider net profit, salary, dividends, or a combination of these when determining an applicant’s borrowing capacity.

Trading history: Most lenders require self-employed applicants to have at least two years of trading history to demonstrate financial stability and consistent income. In contrast, salaried applicants are generally not subject to a minimum employment period.

Affordability assessment: While all applicants undergo an affordability assessment, self-employed individuals may face additional scrutiny due to fluctuations in their income. Lenders may take a more conservative approach when estimating a self-employed applicant’s future income.

Lender requirements: Some lenders have specific criteria for self-employed applicants, which may include a higher deposit, a strong credit score, or a longer trading history.

Despite these differences, self-employed individuals can still access the same mortgage products as salaried applicants, such as fixed-rate, variable-rate, and tracker mortgages. By understanding the unique requirements and challenges of self-employed mortgages, you can better prepare for a successful application.

How much do self-employed mortgages cost?

The cost of a self-employed mortgage is generally similar to that of a mortgage for a salaried applicant, as they both involve the same types of mortgage products, such as fixed-rate, variable-rate, and tracker mortgages. The main factors that affect the cost of a mortgage include the interest rate, deposit size, loan term, and any associated fees.

While the cost of a self-employed mortgage is generally similar to a standard mortgage, the specific terms and interest rates may vary based on the lender’s assessment of your financial profile and risk level. Consult with a mortgage broker experienced in self-employed mortgages to help you find the best mortgage deals for your unique circumstances.

What are self-certification mortgages, and do they still exist?

Self-certification mortgages, also known as “self-cert” mortgages, were mortgage products that allowed borrowers to declare their income without providing extensive financial documentation to verify it. These mortgages were designed primarily for self-employed individuals, freelancers, or contractors who might have had difficulty proving a consistent income through traditional documentation.

However, self-certification mortgages were banned in the UK in 2014. The ban was implemented due to concerns over irresponsible lending practices and the increased risk of mortgage fraud associated with these products.

As a result, self-certification mortgages no longer exist in the UK mortgage market. Self-employed individuals looking for a mortgage now need to provide proof of income through certified accounts or tax returns (SA302s), typically for at least two years, and meet the lender’s specific requirements to secure a mortgage.

Is there anything else self-employed people can do to improve their mortgage chances?

Yes, self-employed individuals can take several steps to improve their mortgage chances and present themselves as reliable borrowers to lenders:

Organise your finances: Keep accurate financial records, including tax returns, certified accounts, and bank statements. Ensure all documentation is up-to-date and readily available when applying for a mortgage.

Maintain a good credit score: Pay bills on time, manage your debts responsibly, avoid excessive credit applications, and check your credit report for errors. A strong credit score can make you a more attractive borrower.

Save for a larger deposit: A larger deposit can improve your mortgage chances and help you secure better interest rates. Aim for at least a 10% deposit, although a 20% deposit or higher is more favourable.

Reduce debt: Pay off or reduce outstanding debts, such as credit cards or loans, before applying for a mortgage. Lenders consider your debt-to-income ratio when assessing affordability, so reducing debt can improve your borrowing capacity.

Stable income: If possible, demonstrate a history of stable income in your industry before becoming self-employed. This can help lenders view your income as more reliable and consistent.

Minimise business expenses: Lenders assess your income after deducting business expenses. By minimising these expenses, you can maximise the income that lenders consider for mortgage affordability.

Choose a suitable business structure: Ensure your business structure (sole trader, limited company, or partnership) is appropriate for your situation and provides the most favourable tax and mortgage conditions.

Work with a mortgage broker: A mortgage broker experienced in self-employed mortgages can guide you through the application process, provide personalised advice, and help you find suitable lenders and mortgage deals based on your unique circumstances.

By taking these steps, self-employed individuals can improve their mortgage chances and better position themselves as reliable borrowers in the eyes of lenders.

In summary, securing mortgages when self-employed can be more challenging than for salaried individuals, but with proper preparation and guidance, it’s entirely achievable. By maintaining accurate financial records, building a strong credit score, saving for a larger deposit, and understanding the unique requirements of self-employed mortgage applications, borrowers can enhance their chances of success. Working with an experienced mortgage broker who specialises in self-employed mortgages can be an invaluable asset, as they can help navigate the application process and identify suitable mortgage deals tailored to each borrower’s unique circumstances. As the number of self-employed individuals continues to rise, the mortgage industry will need to adapt and accommodate their needs, ensuring that mortgages remain accessible and affordable for this important segment of the market.

FAQs:

Are there mortgage brokers who specialise in self-employed mortgages?

How long does it take to get a mortgage offer?

Can I get a mortgage with a self-employed partner?

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

How much income do I need?

Will maternity leave impact a mortgage application?

My most recent year’s earnings were less than my ‘average’ – will this affect my mortgage application?

Can I get a 90% or 95% mortgage if I’m self-employed?

Can new self-employed individuals get a mortgage?

Can I get a first-time homebuyer mortgage while self-employed?

I don’t have any financial accounts yet. Can I still get a mortgage?

Can I get a guarantor mortgage?

Can I use shared ownership?

Isn’t it unfair that it’s harder for the self-employed to get a mortgage?

The perceived fairness of the mortgage application process for self-employed individuals is a topic of much debate. The additional scrutiny and requirements faced by self-employed applicants stem from lenders’ need to manage risk. Unlike salaried employees with a steady salary from a single employer, self-employed individuals’ income can be more variable, making it harder for lenders to assess financial stability and risk. However, the evolving landscape of work and increasing number of self-employed individuals are leading some lenders to adapt their criteria.

Will IR35 affect my mortgage application?

Can government support, like the Self-Employment Income Support Scheme (SEISS), affect my mortgage application?

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