A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Regardless of whether you are employed or self-employed, you would have access to the same rates and mortgage products. Having said that, acceptance criteria for the self-employed vary much more than for an employed person, with some mortgage lenders offering better terms whilst other lenders potentially not lending at all to certain self-employed.
We are going to explain the key points to help you navigate what can be a complex topic.
What are the challenges that can make self-employed mortgages “more challenging”?
As long as you meet the lender’s criteria as a self-employed, getting a mortgage should not be more complicated than for those with employment. However, there are a number of challenges that is important to appreciate when it comes to do your mortgage. Let’s take a look at these challenges and what you can do to best prepare.
Banks will assess the stability of your income and take a view on the sustainability of your future earnings
Banks tend to be more cautious when it comes to mortgages to business owners. They assume that your income fluctuates more than a full-time employee, and that a business will in general suffer more from an economic recession.
It also does not help that banks tend to generalize all businesses withing a market “sector”. For example, if you run a retail business, a bank may assume that your earnings will be negatively impacted by the economic recession, irrespective of how well your own individual business may do.
Furthermore, if you have structured your finances in a tax-efficient way, as sensible business owners would do, it can be even harder to prove to a bank that you can afford the mortgage that you want.
The challenge for a self-employed is often to demonstrate the financial stability of the business, the income sources, as well as the track record and the sustainability of the expected future income.
Banks’ acceptance criteria change regularly making it difficult to navigate the available options without proper support.
Whether you are a limited company director, sole trader or contractor – each one of you will have a set of unique individual challenges.
Acceptance criteria for a mortgage tend to change regularly, in line with how well the economy is doing. For example, during the covid-19 pandemic it almost felt near too impossible to some self-employed to be able to get a mortgage.
A specialised mortgage adviser can provide you with valuable insight into the up-to-date lenders’ acceptance terms. They will be able to point you to the mortgage lenders with acceptance criteria and product offering most suited to you, and find the most cost-effective mortgage based on your circumstances and goals.
What constitutes self-employment for mortgage lenders?
For mortgage application purposes, self-employed individuals include freelancers, contract workers, sole traders and limited company directors who earn their primary income from a business they own at least 20%. Note that HMRC would consider a limited company director as an employed person instead and charge applicable personal tax on any director salary and dividend.
Are self-employed individuals subject to higher mortgage rates?
The short answer is “No”. Contrary to what some people believe, if you’re able to meet the lender’s criteria as a self-employed individual and can demonstrate steady ongoing income, then your interest rate will not be affected by how you earn your money. What determines the mortgage rate applicable to you will be your overall financial picture – such as affordability, credit history and amount of deposit & equity available in the property.
If you find that a specialist lender has the right products for your needs, keep in mind that their interest rates may be slightly higher than if you were to get a loan from the high street. This is because specialist lenders are usually willing to take on more risk when lending out money.
How long do I need to trade before I can apply for a self-employed mortgage?
To be eligible for a loan, depending on the mortgage lender you may be required to evidence 2 to 3 years of trading history. You typically evidence this via the tax return or the company accounts. There are however some exceptions, and some lenders may take into account just 12 months trading history, depending on your background – this is a more specialist area and not all newly self-employed may be accepted with a short trading history. A self-employed mortgage broker can typically guide through the options.
No matter how many years you have been trading, if the most recent year’s profit figures have dropped then lenders will typically assess your affordability on the lower recent profit figure. If on the other hand the profit has increased steadily, some lenders can consider the last year profit only, which may maximise your affordability; whilst other lenders would typically average the last two years profits.
What documents do I need for a self-employed mortgage?
When you apply for a mortgage, you need to be able to evidence your identify and your income. The key documents required are:
- a valid passport or driver’s license
- utility bills or council tax statements that prove your address
- bank account statements covering the last 3 to 6 months to evidence your recent turnover
- your last 2 years personal tax return showing either your net profit if you are a sole trader; or your salary and dividend if you are a company director.
- As a director of a limited company, you may also be required to provide the last 2 years company accounts. Some lenders let you consider your salary and the company net profit, instead of working on salary and dividends
- If you are a contractor, and whether your work via an umbrella company or not, some lenders will take into account your gross contract rate, for example your annualised day rate; instead of working with your taxable net profit. As a contractor you would need to provide current and previous contracts that can evidence the length of time you have been contracting for, and any breaks between contracts.
- The important thing to also recongise is that when it comes to self-employed, a mortgage underwriter can ask for additional documentation. An experienced mortgage broker can also guide you and help you prepare to avoid getting caught in a situation where your mortgage application may get delayed (or even worse cancelled!) because of incomplete or missing documentation.
In summary, self-employed mortgages do not need to be a challenge, but you need to do your homework and it will help getting help and guidance from an expert in the field
- Prepare your documentation You want to make sure that your documents, whether your accounts, your tax returns and your bank statements can evidence at best your business earnings and potential. Make sure you have all your documentation up to date, with the latest tax return submitted and any taxes due to HMC paid in good time.
- Seek advice from an experienced broker Each lender has different acceptance criteria, and a mortgage broker can help you determine which lenders are best suited to your circumstances and needs.
Your Mortgage Experts
- At Your Mortgage Experts we are specialist in arranging mortgages for business owners and Limited Company Directors, as well as Sole Traders, Self-Employed Contractors, and Limited Liability Partnership.
- We work with accountants regularly, with the knowledge and experience to understand your company accounts, how you receive your income, and the value that your business generates.
- We have the expertise to present your business accounts to a mortgage underwriter in the correct way.
- We can get you a mortgage not just based on your salary and dividend but also looking at the net profit of the business.
- We have access to 1000s of mortgage product deals from a large number of mortgage lenders, including specialist lenders that best understand the more complex needs of business owners and limited company directors.
- You will not get this expertise if you just approach your local bank or try to find your own mortgage online.
To request a free consultation with one of our expert advisers call us today on 020 8154 1111.
Or drop us a line: email@example.com
Your Mortgage Experts, London W9 2HQ.
Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.