Our guide to self-employed mortgages
Since the beginning of this millennium there has been a significant increase in the number of self-employed. A report in the Guardian newspaper at the beginning of 2018, for example, suggests that the figure leapt from 3.3 million in 2001 to the current estimate of 4.8 million.
It has conventionally been the case that the self-employed are likely to find it more difficult to raise any kind of credit, but a mortgage in particular. And with stricter new mortgage affordability rules being introduced in recent years, it may seem almost impossible to get a mortgage if you are a self-employed.
Our guide to self-employed mortgages may help to explode that myth.
Our guide to self-employed mortgages
Self-employed mortgages – or mortgages for the self-employed?
Perhaps the first part of the myth that needs to be dismissed is that there are such things as self-employed mortgages – a term which suggests that some mortgages are specifically designed for the self-employed and offer different terms and rates of interest than other “standard” mortgages.
The reality is that the self-employed secure exactly the same kind of mortgage as anyone else – they may often simply find it more difficult securing that mortgage because of their self-employed status. A more accurate description, therefore, might be mortgages for self-employed applicants.
Why are mortgages for the self-employed more difficult to obtain?
In 2014, tough new laws relating to mortgages were introduced, making it mandatory for borrowers to prove their income and the lenders having to carry out affordability tests to make sure a borrower can afford to repay the mortgage.
For newly self-employed people or those in longer established businesses where their profit varies year-on-year, it can be difficult to provide a proof of income.
Fluctuating income also means difficulties for mortgage lenders in calculating the affordability of the loan – hence why, in some cases, self-employed mortgages are more difficult to obtain.
While this does sound all doom and gloom, the good news is that we can help you find a mortgage for the self-employed.
How much deposit will I need?
This depends on the mortgage product provider, with some lenders requiring a 10% deposit and others requiring 40%. The bigger deposit you have, typically the more choices you will have choosing a mortgage.
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 will stem from you proving your income.
Proof of earnings
Providing sufficient evidence of earnings clearly differs from one case to another – much depends on the nature of your self-employment. It can also vary from lender to lender, with some self-employed mortgage lenders having stricter lending criteria than others.
CIS contractor mortgages
With CIS contractor mortgages, in some cases, that evidence may be relatively simple and straightforward to provide. For example, if you are a self-employed subcontractor – a tradesman, for example – who receives regular monthly payments from a main contractor registered under the HM Customs and Revenue (HMRC) Construction Industry Scheme (CIS), you will receive monthly payslips.
These payslips from the contractor indicate your gross income and the net income received after deductions made as your payments towards future tax liabilities and National Insurance contributions.
CIS contractor mortgage lenders typically accept between 6 and 12 months of such payslips as evidence of your income.
Accounts and tax year overviews
Evidence of your income from self-employment may also be provided by way of your business accounts signed and certified by a chartered or a certified accountant.
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.
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, the lender might base any decision on the most recent, and therefore lowest, income figure.
In addition to professionally prepared accounts, a lender may also ask for evidence of income based on your tax returns.
Form SA302 is a certificate showing the income you have reported to HMRC – but is issued automatically only if you have submitted a paper tax return before the 31st of October following the end of the tax year on the 5th of April.
If you submitted your tax return online, therefore, you or your accountant must order your SA302 from the tax office – the relevant webpage of HMRC describes how to order your SA302 or an alternative tax year overview.
You will need to give your full name, date of birth, current address, your Unique Tax Reference (UTR) or alternatively your National Insurance number.
If you have only recently become self-employed, then furnishing historic accounts and records is clearly impossible. In that event, lenders are likely to consider your application in the light of the income you are currently making, whether you were working in a similar line of business before becoming self-employed, and your current status – whether you are you a contractor, sole trader, a partner or a company director, for example.
You may have only one year of accounts to produce, for example, and the lender may then take a decision on whether to average out monthly earnings across the whole of your first year in business or be prepared to accept the results for the most recent months’ trading.
Depending on the strength of the evidence you are able to produce, the mortgage lender may offer a deal that comes at a slighter higher rate of interest compare to self-employed people who have evidence of several years’ trading.
Directors of limited liability companies may also be regarded as self-employed for the purposes of applying for a mortgage.
In this case, your income is likely to be assessed by one of two methods:
- either your income is assessed according to the salary you draw from the company, together with any dividends you receive from it; or
- your director’s salary may be taken into account along with your share of the retained profits of the company.
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.
Stress testing typically allows for interest rate rises as well as changes in personal circumstances (such as childbirth or the loss of one salary for joint mortgages).
Once they have all this information, they’ll make a decision based on the affordability of the mortgage.
Self-employment takes many different shapes and forms, yet any mortgage lender’s consideration of your application has two principal objectives in view: to assess your actual income and to predict the reliability and security of that income over the term of any mortgage granted.
At NeedingAdvice, we understand the unique needs and difficulties faced by our self-employed clients’ seeking a mortgage. We work with a number of specialist mortgage lenders, meaning we can provide a tailored service matching you to the most suitable mortgage product.