Can I Get a Mortgage If I am Self-Employed?
For many, the idea of becoming financially independent from an employer and being able to be your own boss is something to aspire towards achieving. Being self-employed has many advantages; often offering greater flexibility than you would otherwise get in a typical 9 to five job, more freedom, as well as potentially lower costs when it comes to commuting.
It has become increasingly popular in recent years to become self-employed, with reports suggesting that the number of people who are now self-employed in the UK has risen dramatically, from 3.3 million in 2001, to now over 4.8 million. However, there are certain perceived disadvantages, such as the challenge of applying for a mortgage and being accepted, due to a struggle to prove their income.
It has also been reported that nearly a third of self-employed homeowners feel that there is a form of bias against them. Assessing and understanding some of the main challenges facing self-employed workers, contractors and freelancers when it comes to getting a mortgage could help you understand the process and rationales around self-employed mortgages to potentially help you to get one.
Why Are Self-Employed Mortgages So Difficult?
It has become more difficult for those who are self-employed to gain access to mortgages, in part due to the 2007 credit crisis. Prior to 2007, self-employed workers could apply for a self-certification mortgage. This made it far easier for people who worked for themselves to apply for mortgages, as it was not required for them to provide evidence of their income via payslips and bank statements.
According to the Council of Mortgage Lenders, over 120,000 loans were taken out by those who were self-employed in 2017, an increase of 11 percent from 2015. In comparison, loans to employees rose within the same period by just under half that proportion.
Experts have partially attributed this to the continual growth of the ‘gig economy,’ with companies such as Uber and Deliveroo becoming increasingly popular. This has led to a profound change in many peoples’ employment patterns. As a result, lenders are gradually realising they need to adapt accordingly.
Requirements to Get a Mortgage When Self-Employed
Most mortgage lenders will require you to provide at least two years of accounts or tax returns in order to prove your income. You will likely need the following:
- A Good Credit History – If you are unsure of what your credit score is, you can easily check by signing up to one of the three main credit reference agencies (Call Credit or Experian, for example) with it often being possible to check your credit file for free
- A Deposit – Different lenders will have different requirements when it comes to the deposit amount required. It is commonly accepted however, that depending on the circumstances and whether you are acquiring a mortgage through the Help to Buy Scheme or not, that you should expect to need between 5-20% of the property's overall value as a minimum deposit
- Evidence of Regular Paid Work – As with all mortgages, you will need to show regular income. In most peoples' case, payslips, career progression potential and opportunities and income over a period of time suffice. However, for self-employed people, there is naturally less stability and continuity in employment. Hence, if as a self-emplyed worker you can show significant income, you will improve your mortgage chances
- An Accountant – Lenders usually prefer for accuracy reasons for self-employed workers to have a chartered accountant on board. By having an accountant, you will be better placed to proeprly present and indeed understand the financial requirements and paperwork. You will also be better able to provide the necessary documentation for your application when needed
- Two Years Accounts Proving Your Income – Mortgage lenders will usually require self-employed applicants to provide their past two years of personal and business accounts. This is required to be sure that their is sustained affordability for the mortgage and also to help prevent the applicant 'going under,' not being able to meet the required repayments when they are accepted for their mortgage
What if I Already Own a Property?
If you already have equity in an existing property, this can work to your advantage. Ultimately, when it comes to lending the money for a mortgage, the lenders want to mitigate and reduce their risk, which would come in the form of the borrower not being able to repay the money. Hence, all first and second charge mortgages are secured against properties by their very nature and should a prospective borrower already own or have a percentage of equity in another property, this is positive in lenders' eyes.
Prospective borrowers who have equity in another property or high value asset will likely show a degree of responsibility and will also have assets of high value to fall back upon should they default on the mortgage in question.
Does My Business Set Up Affect My Chances of Getting a Mortgage?
When one becomes self-employed, there are three mainstream business structures to choose from when you start working for yourself: sole trader, partnership and limited company. It is possible that your chances of having a mortgage application approved may be influenced by which of the following categories you fall into:
- Sole Trader
- Limited Company
As you are solely responsible for yourself, you need to mak sure that your accounts are documented, which entails a is a fairly simple process. It is important to have these in order as it is these profits that lenders will be assessing you on. Your lender may also want to see your SA302 form, which demonstrates the total income you have received annually and the tax due. With recent changes by HMRC in relation to Making Tax Digital, all your receipts and documentation will need to be stored electronically, which means that it should be more easily accessible and submitted.
When it comes to partnerships, mortgage lenders will be looking at each partner’s share of any profit made as a company. This means that you should make sure it is completely clear on your accounts exactly how much annual income you have both received.
In most cases, people who have set up a limited company will have at least one director who usually pays themselves a basic salary as well as dividend payments to top up their earnings. It is important that you make sure that the mortgage lender takes into account both of these parts of your income when it comes to eligibility. Dividends are taxed very differently from salaries and all of this will need to be properly acounted for.
One thing to remember if you run a limited company, is that not all lenders will assess retained profits in the business, which is something some directors decide to do, rather than taking it out as a salary or dividends. Money taken out of a business can incur hefty taxation if not done correctly.
Unfortunately, this could mean that it is potentially more difficult to be able to be accepted for a mortgage. A way of tackling this issue is to employ a mortgage broker, who will be able to find you a suitable lender that does not take issue with taking retained profits into consideration.