Our Guide to Self-Employed Decreasing Profits Mortgages
One of the most notable changes has been the inexorable rise in self-employment. In just 16 years, reported the Guardian newspaper at the beginning of 2018, the number of self-employed in the UK has jumped from 3.3 million to nearly 5 million.
If you are self-employed, you probably know how difficult it can sometimes be securing any kind of credit – and, if you’ve ever tried to get a mortgage, you’ll have discovered how especially difficult that is likely to prove.
The challenge lies in convincing any lender that, not only is your current income sufficient to make the necessary repayments, but that your self-employment is secure and steady enough to keep them up throughout the term of the loan – and, in the case of a mortgage, of course, that is likely to be many years.
If it is difficult to convince a mortgage lender that you are good risk if you are self-employed, imagine how much more of a challenge that is likely to be if your business is in a temporary slump? The good news is that a self-employed with decreasing profits mortgage may still be within your reach.
What are self-employed mortgages with decreasing profits?
You might see these self-employed mortgages described under a just that term, but the reality is that, whatever your employment status, a mortgage is a mortgage – and the same as it is for anyone else.
What is recognised is the potential difficulty in securing that mortgage if you are self-employed – and especially if your business is experiencing declining profits.
A more accurate description, therefore, might be to call them mortgages for the self-employed with decreasing profits.
Why are mortgages for the self-employed more difficult to obtain?
Residential mortgages are regulated by the Financial Conduct Authority (FCA). In its latest review of the mortgage market, published in May of 2018, the FCA confirmed its long-held view that responsible mortgage lenders must carry out affordability tests to ensure that any borrower is able to afford to repay the mortgage.
These include what the Money Advice Service describes as “stress tests” – whether the applicant could still afford the mortgage after some change in circumstances, such as a fall in income, retirement, maternity leave or an increase in interest rates.
Proof of income is therefore typically demanded, with lenders looking for what the FT Adviser, on the 7th June 2018, called “balanced and sustainable” income – a test which any newly self-employed person, facing the likelihood of a wildly fluctuating income, may find difficult to pass.
How much deposit will I need?
The size of the deposit you need may vary according to the lender and the particular calculation made about your ability to repay the loan for which you are applying.
Some lenders might require a deposit of no less than 40%, for example, whilst other may be content with 10% – but the bigger the deposit, the less you need to borrow, of course, and the greater the chances of your application meeting with success.
How much can I borrow?
Some lenders may allow you to borrow up to 4.5 times your annual income if you are self-employed.
For both the employed and the self-employed, the Mortgage Affordability Calculator maintained by the official Money Advice Service may give a rough idea of the size of mortgage for which you may be able to apply.
However, your mortgage lender or broker will need to calculate the affordability of any home loan you are applying for based on your own individual financial circumstances.
How much you can borrow depends on the proof of income you are able to furnish. What is more, sufficient evidence may vary from one lender to another – much depending on the nature of your employment – with some lenders adopting stricter criteria than others.
Evidence of income
Most lenders expect to see evidence of your income from self-employment in the form of business accounts signed and certified by a chartered or a certified accountant.
If you are recently self-employed, these may be difficult to provide, but the longer you have been self-employed, of course, the more years’ accounts you are able to provide – mortgage lenders typically look for at least two years’ accounts, but three years provides even stronger evidence, and a greater chance of your application being successful.
Do lenders’ look at my best years’ or worst years’ trading?
A feature of self-employment, of course, is that income may fluctuate – quite widely – from one year to the next. If there appears to be an upward trend in your earnings year on year, for example, a lender may take the average of your income over the past two or three years – if the trend is downwards (because your profits are decreasing, for example), the lender might base any decision on the most recent, and therefore lowest, income figure.
How lenders calculate your affordability
Once the lender has seen your evidence of income, they may include other assets in the mix too, such as a pension or savings.
They will then assess what level of monthly payments you can afford, after allowing for various personal and living expenses, as well as ‘stress testing’ your ability to repay the mortgage, as previously described.
Once they have all this information, they’ll make a decision based on the affordability of the mortgage.
Next steps – self-employed decreasing profits mortgages
The self-employed may have a harder time than most in obtaining a mortgage – and if your business is facing a decrease in profits, those difficulties are likely to be compounded.
While this does sound all doom and gloom, at Needing Advice we can help identify the most suitable mortgage for the self-employed – even if your profits have been decreasing.