Mortgages for the self-employed: What do you need to know?
One of the biggest trends in the UK labour market in recent years has been the growth in the number of people who are choosing to work for themselves. It’s estimated that around 15% of the working population now work for themselves, which amounts to almost 5 million people.
While being self-employed can give you flexibility when the time comes to look for a mortgage, things may not always be so straightforward. We’ve used our experience of working with self-employed people to put together this guide to help you understand the process.
Who is self-employed?
It seems like a simple question but the definition of what counts as self-employment is frequently open to interpretation in the UK. Evidence of this can be seen in recent court cases that have seen workers seek to be recognised as employees. However, as far as mortgage lenders are concerned, you are broadly considered to be self-employed if you are responsible for paying your own tax and national insurance contributions.
Freelancers, sole traders, sub-contractors or people working on a fixed-term contract may all be considered self-employed by some mortgage lenders.
If you are a shareholder in a company, lenders may also class you as self-employed, but this will depend on a number of factors such as what percentage of shares you have in the company and whether you derive your main income from that company. This is one of the occasions where the expertise of a specialist mortgage broker can be indispensable, as they will be up to date with the different definitions of ‘self-employed’ currently used by individual mortgage lenders.
Why might being classed as self-employed pose a problem getting a mortgage?
Mortgage lenders will use your income to calculate how much they are prepared to lend you, as well as using it as a measure of your ability to meet mortgage repayments (together with looking at your other financial commitments and your credit history). In addition to the level of your income they will also consider how stable it is. In short, an applicant who has been working for an employer for a long time and has a relatively high salary is a lower risk than someone who has had many different jobs over a short period and/or has a low or varying salary. Past behaviour is used as an indicator of future behaviour.
When you work permanently for an employer your income is generally consistent and simple to prove. Both your contract and payslips are evidence of the length of time you have worked for a company and the level of your pay. However, if you are self-employed your income may be more irregular and less straightforward to evidence. Things become even more tricky if you have only been self-employed for a short time.
How can you improve your chances of getting a self-employed mortgage?
There are a number of steps that you can take to improve your chances of getting a mortgage when you are self-employed.
1. Understand your self-employment status and what that means to lenders
The way in which a mortgage lender will assess your application will vary depending on the type of self-employment you are engaged in.
If you work as a contractor who earns a day rate, mortgage lenders will generally multiply that rate by the number days worked per year. They’ll also tend to be looking for a contract history of at least 12 months. CIS subcontractors will need to ensure that they approach a lender who understands what can be quite a complicated scheme to an outsider.
If you are a sole trader, lenders will take a different approach depending on whether your income has increased or decreased over recent years.
If you are the director of a limited company, there are a couple of ways that your income may be calculated. Either a mortgage lender will calculate your income based on any salary together with retained profit in the business, or alternatively, income will be based on salary plus dividends.
If you are in a partnership, you should ensure that your accounts clearly show each partner’s share of any profits.
2. Keep your accounts up to date
While it’s good business practice to keep your accounts up to date, the reality is that for many self-employed people, in particular sole traders, this is one task that can often take a back seat. However, if you are considering applying for a mortgage as a self-employed person it is vital that your accounts give prospective mortgage lenders an accurate picture of your income.
If you struggle to do this yourself then it may be time to hire a professional. Which brings us to…
3. Hire an accountant
Having your accounts put together by an accountant gives lenders an added assurance that the accounts are accurate. Furthermore, many lenders will insist that your accounts are signed off by a certified or chartered accountant before they will even consider your application.
Using an accountant isn’t without problems though. Some may choose to minimise your income in your accounts in order to reduce your tax burden. While this is generally to your advantage, when you come to apply for a mortgage you will want to ensure that you are showing the largest income possible. In these circumstances you should speak to your accountant so that they understand that you intend to apply for a mortgage and can approach your accounts accordingly.
4. Get your SA302 forms
SA302 forms are issued by HMRC and show your annual tax calculations. Most lenders will want to see at least 2 of these, and some will ask for 3.
If your tax return is filed online, then these can be printed off directly from HMRC’s website. If you file paper returns however, you will need these sent to you, and so should factor this time into your application.
5. Keep the same business structure
If you’re considering changing the legal structure of your business, for example moving from being a sole trader to setting up a limited company, then wait until the mortgage application process is complete as some lenders may look upon any change unfavourably.
6. Make yourself more attractive to mortgage lenders
As with any mortgage applicant, there are some things that you can do to make the acceptance of your mortgage application more likely. These include ensuring that your personal finances are in order, avoiding ‘red flag’ outgoings such as payday loans and saving up a larger deposit.
7. Talk to a specialist mortgage broker
Although we’ve tried to outline some of the steps you can take to maximise your chance of finding a favourable mortgage deal, the bottom line is that is very difficult to give a ‘one size fits all’ answer to the question of how to get a mortgage if you’re self-employed.
A specialist mortgage broker will be able to consider your circumstances as a whole and then match your application with a lender who will view those circumstances most favourably.
At Simply Lending Solutions we know how many years accounts different lenders require, which ones consider retained profit when calculating income and which understand the intricacies of the CIS scheme, to name just a few concerns you may have.
We also understand that this is not a static picture. Lenders regularly alter their criteria, and using a mortgage broker experienced in working with self-employed people will give you the security that you are getting the most current advice available.
Working for yourself can be exhilarating and frustrating in equal measure. It can give you both control and flexibility, but as we’ve seen it may mean that finding a suitable mortgage deal can be complicated. The one thing you probably don’t have as a self-employed person is a surplus of time to spend hunting for a competitive deal. So, whether you’re a company director or a contractor, a sole trader or a freelancer; if you’re looking for help finding a self-employed mortgage speak to Simply Lending Solutions today.