Self-Employed Mortgage

Podcast approved by The Openwork Partnership on 26/09/2024.

Is it hard to get a mortgage if you’re self-employed?

You can get a mortgage if you work for yourself, but lenders prefer job stability and the predictability that comes from a reliable income. If your income tends to fluctuate from month to month, as it often does for the self-employed, lenders may be more nervous about letting you borrow.

Because of this, you’re likely to be asked for more details about your income to get accepted for the mortgage. For self-employed applicants, mortgage lenders generally require at least two years of accounts signed off by a certified or chartered accountant.

If you show a consistent or increasing profit over a number of years it will help your application, as lenders look at average profits over time to assess your risk profile. If your income varies dramatically from year to year, you may need to provide evidence of future income, such as new clients or contracts, or to prove that you have a significant amount of savings.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed, for example?

If you’re your own boss, you’ll be getting the same mortgage as someone in salaried employment. People in salaried employment can hand over their pay slips and contracts to prove their income in the past and also for the future.

The self-employed may not be able to prove how much they will earn in the future, but generally a 95% mortgage is available for self-employed applicants.

How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?

It is possible to get a mortgage if you have been only trading for one year, but you may need a specialist lender. You will be seen as a high risk applicant if you’ve recently become self-employed.

Lenders on the high street are much more restricted, so they are more likely to decline applicants with less than two years of accounts.

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

The majority of lenders will not consider income from self-employed applicants where profits have declined year on year.

However, if net profit has only fallen within a small percentage of the previous year, lenders may potentially consider this, subject to a valid explanation from the company accountant.
Lenders would then use the lower income from the latest year only.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage as someone who is self-employed?

Lenders often provide self-employed individuals with mortgages up to 4.5 their annual income, based on two to three years of accounts.

With a substantial deposit, stable income and a strong credit, borrowers may qualify for up to five times their income, subject to the lender’s criteria. That said, it’s not uncommon to find lenders who are prepared to offer five times your salary, and in some cases, up to six times.

However, some lenders set a maximum of 3.5 times salary for self-employed applicants.

What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?

The majority of mortgage lenders will ask you for a deposit of at least 10% of the property’s value. However, if you have an excellent credit score, you could secure a mortgage with a 5% deposit. This is ultimately determined by how flexible your lender’s eligibility criteria is.

With regards to using a self-employment grant as a deposit, it will depend on the mortgage lender. Some lenders may accept deposits from self-employment grants, but a lot won’t. You always need to show where the deposit has come from, to meet anti-money laundering regulations.

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

Self-certification mortgages are no longer available in the British mortgage market. They once allowed you to apply for a mortgage without having to provide paperwork to prove your income. Lenders took your word for how much money you made, and you were almost guaranteed acceptance.

How will you be assessed as a self-employed mortgage applicant?

Mortgage lenders assess self-employed applicants differently from those with traditional employment. They will analyse your income to determine if it’s stable and sufficient to cover mortgage repayments. They may request tax returns, business accounts or SA302 forms as evidence.

They also look at accounts history, and require two to three years of financial accounts to assess your income stability. If your income has been consistent or growing during this period, it can work in your favour.

A good credit history is essential for mortgage approval. Lenders will check your credit report to assess your financial responsibility.

The size of your deposit can affect the interest rates and deals available to you, and a larger deposit can improve your borrowing options. Lenders will also look at affordability, by evaluating your monthly expenses to ensure you can comfortably afford the mortgage payments.

Will IR35 affect my mortgage application?

IR35 was a piece of legislation introduced by HMRC to prevent contractors and freelancers from exploiting the tax benefits of being classed as a limited company.

Tax legislation states that day rate contractors with similar working practices to an employee are classified as a contractor ‘inside IR35’.

A day-rate contractor inside IR35 is likely to have to work through an umbrella company or join their client’s payroll. Traditionally, freelancers who work via a limited liability company that’s responsible for its own financials will pay their own taxes.

The simple answer to the question is yes, because with some lenders it may change your affordability level. It all depends on each individual lender’s criteria.

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

It depends on which type of self-employed worker you are. If you are a sole trader, lenders often look at your net profits over the past two or three years and take an average. If you are a limited company director, you will usually pay yourself a salary and dividend payments – both will be taken into account by a lender.

Be aware that if you choose to retain profits in your business rather than drawing them out, this can cause problems. Some lenders don’t include retained profits in their calculations.

The third type of self-employed worker is a contractor. Lenders may take the average of your income over the last few years, while others may take an annual figure calculated from your day rate.

How do I prove my income? What documents do I need to apply for a mortgage if I’m self-employed?

To get a self-employed mortgage, you will usually need to provide a few documents. You will need two or more years of accounts, ideally prepared by an accountant.

You then need SA302 forms or a tax year overview from HMRC, again for two or three years. If you’re a contractor, you will need evidence of upcoming contracts, and evidence of dividend payments or retained profits if you are a company director.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 26/09/2024.