Employee or Self-employed? How do lenders see you?
The chances are you’ll be aware of the fact that it can be complicated to find a suitable mortgage deal if you are self-employed. However, for some people the initial complication is trying to assess whether they are an employee or self-employed in the first place. Simply Lending Solutions is here to help.
What’s the legal definition of ‘self-employed’?
This is the first snag. In the U.K there is no official definition of ‘self-employed ‘in law. HMRC provides an overview of the sort of criteria that may see you classed as self-employed, however, HMRC is only concerned with whether you are classed as self-employed for tax and National Insurance purposes. You can’t guarantee that a mortgage lender will view you in the same way.
Who might be considered self-employed?
There are some forms of employment that are more easily identified as self-employed. If you are a sole trader, working on a freelance basis or working as a contractor the chances are a mortgage lender will consider your application as that of a self-employed person.
A common way of assessing whether you are self-employed has been to look at how you pay tax. Essentially if you are responsible for your own tax and National Insurance payment, rather than payed via PAYE, you can be pretty sure that you will be considered to be self-employed. However, this is not the full picture.
Why are Company Directors different?
If you’re the director of a limited company you may receive some income via PAYE, i.e. you are paid as an employee of the company you also fully or partially own. You could think this means you would be seen as an employee by mortgage lenders.
However, in general if you own more than 20% to 25% of the business, lenders will view you as self-employed. They will accept your payslips as proof of your gross income from the company but depending on the lender they may also take into account retained profits and income from dividends. It is important that you speak to a broker who understands how lenders are likely to class you, and what income they will consider.
What about multiple income streams?
We’ve already looked at how Company Directors may receive income from more than just a ‘wage’. It’s also worth noting that some people may work in both an employed and self-employed status. For example, teachers can be employed directly by a school, but supplement this income by working in a self-employed capacity for an examining board. In these cases lenders will look at where the majority of your income comes from – although they could take into account additional income for the purposes of calculating mortgage loan amounts.
A note on partners
If you are in a partnership, you will be treated in the same way as a sole trader.
Use our quick calculator to get an idea of whether mortgage lenders will consider that you are self-employed or employed
Understanding whether lenders will treat you as a self-employed person can help you to ensure that you have gathered all the relevant documentation when you come to make your application. It will also help your broker ensure that they approach lenders who are likely the most sympathetic to your individual financial circumstances.
Once you recognise how lenders are likely to treat you can also get a more accurate picture of the level of mortgage loan and the interest rates that you may be able to access.
Our calculator will give you a general idea of how much you could borrow.
Self-Employed Mortgage Calculator
Our mortgage borrowing calculator will give you an estimate of the size of mortgage you can get as a self-employed person through our whole of market network of lenders. Enter your income/bonus details and click the ‘Calculate’ button.
This is only an indication, and you should contact our experienced independent advisors to get an accurate assessment based on your personal situation, credit history and the property upon which the mortgage is to be raised.
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