This guide answers questions about mortgages for the self-employed, with advice on boosting your chances acceptance. You deserve the same opportunities to get on the housing ladder as your office-bound peers.
What is the definition of "self-employed"?
The government says: “.... a person is self-employed if they run their business for themselves and take responsibility for its success or failure”. If you’re a freelancer or contractor, involved in a partnership, or own a limited company, you can be considered self-employed.
Lenders may use a definition of someone with a stake of 25% or more of the ownership of a business.
Which mortgages suit the self-employed?
There are no special types of self-employed mortgage. You will be in the market for the same products as other applicants.
Confusion arises from self-certification mortgages, which were banned in 2011 by the Financial Conduct Authority. These allowed people to certify their ability to repay rather than to prove it, and were thus favoured by the self-employed.
Unfortunately though they were ripe for abuse and were removed from the UK market.
What will you need to apply?
You will need 2+ years of accounts for most applications, along with a track record of regular work (ideally over 3+ years).
Which figures will a lender look at?
If you are a sole trader or in a partnership, lenders will look at your share of profits.
In both cases, lending calculations are based on average profits. If your income has been increasing, average earnings over 2-3 years will be used; if it’s decreasing, the latest and lowest figure will be used.
For contractors, lenders will take your day rate and multiply it by the number of working days in a year for an indicative salary figure.
For owners of limited companies, lenders will look at salary and dividends. Retained profits (money invested into the business) may be considered by some lenders, but should not be relied on.
How can you prove income?
By providing accurate and detailed accounts, preferably compiled by a chartered accountant. Most lenders require a minimum of 2 years. Some will accept 1 year, but this will limit your options.
An SA302 form, available from HMRC, can provide evidence of earning for up to 4 years.
Be honest about gaps in your earning: don’t attempt to hide them. Be ready to explain them and to demonstrate you’ve prepared for and controlled against gaps in the future.
What works in my favour during the application?
Working with a broker will give you access to experience and expertise. They can point you toward the most suitable mortgages, and help you maximise the chances of acceptance.
Your application will be viewed more favourably if you left employment to work as a contractor in the same industry.
Evidence of future work, preferably regular contracts, will work in your favour.
Good average income and a good deposit will give you a stronger loan-to-value ratio, meaning lenders will be taking less of a risk as they are lending to someone with a more demonstrable capability to repay.
What works against me during the mortgage application?
It’s unlikely you’ll be successful applying for a mortgage before filing your first tax return, as you have no proof of income.
A low income and low deposit will give you a less favourable loan-to-value ratio.
Creative accounting techniques to minimise profits for tax purposes will impact negatively on your mortgage application, which rely on you demonstrating capacity to generate profit.
Lenders will look for red flags in the months before your application: avoid big purchases, extravagant holidays, or payday loans.
If you have any other questions about getting a mortgage if you’re self-employed, speak to us today; we’ll be happy to answer.