Self Employed
Remember the days before you jumped the corporate ship? You worked PAYE–whisper it–for someone else. Getting fixed up with personal loans and a mortgage back then was pretty easy.
Provided you could cobble together a decent deposit and had a steady wage coming in–preferably two–all that remained was to spend many a happy evening scouring Rightmove for the perfect pad.Now you’re self-employed, getting a mortgage is way, way tougher… or is it? Let’s find out.
So, can you get a mortgage in the UK when you’re self-employed? Of course, you can. If you work for yourself and want to re-mortgage or buy a new home, you’ll just need to take a slightly different route.
Before 2008 and the credit crunch, things were admittedly easier. If you were self-employed and looking to put a roof over your head, you could apply for a ‘self-certification’ mortgage.
There was no need to produce bank statements or payslips to back up your income claims. You simply rocked up at the bank or building society, told them your earnings and picked up the keys. It wasn’t unusual to be fast-tracked.
These ‘self-cert’ mortgages were designed with freelancers, business owners and contractors in mind. But they were abused and their use became much wider than that. Applicants frequently exaggerated their earnings to land a larger mortgage.
They were officially called stated-income loans, but became known as ‘liar loans’.Inevitably, stated-income loans were banned by the regulator in 2014 under the Mortgage Market Review. Since then, it’s been much tougher for the self-employed to get a mortgage in the UK.But wait. It seems that self-cert mortgages are back. A business operating from the Czech Republic has started offering self-cert mortgages priced at base rate plus two percent. In its first week, selfcert.co.uk was inundated with over 4,000 enquiries. With more than enough business to eat up its lending funds, the firm initially had to close its doors to new business.
All well and good. Except that the regulator is not impressed. They’ve warned that buyers will get no protection under the Financial Ombudsman Service because the Czech firm is outside its authority.But hey, what do you care? It’s their risk, isn’t it? Well, yes, but if you miss payments or don’t slavishly obey the rules in the small print, you won’t enjoy the same protection you’d get from a UK mortgage lender.
That might mean sky-high charges and interest penalties. And the company could even take out a repossession order on your home.Let’s assume, then, that that’s a route you want to avoid. What other options are open to you if you’re self-employed and want a mortgage in the UK?
First up, let’s clear up an urban myth. You won’t be applying for a ‘self-employed mortgage’. There’s no such thing. You’ll be getting a standard mortgage. It's just one that requires you to hop through a few more hoops than if you were on PAYE.The main thing to bear in mind as a self-employed worker is that you’re going to need to prove your income. Lenders will usually want to see two or three years’ accounts. If you can show more, so much the better.
You’ll also need an accountant, proof of regular work through your business bank statements, a sound credit history and a healthy deposit.Banks and building societies will make their assessments on your average profit in the three years or so leading up to your application. If an accountant has done your books, that’s good news for lenders.All the better if they’re certified or chartered. But make sure you’re presenting lenders with up-to-date figures.
What if you don’t have at least two years’ accounts? It’s not a deal-breaker. There are mortgage lenders that will still give you the time of day. It’ll be up to you to demonstrate a regular flow of work or proof of work yet to come.You might also be working as a contractor in your regular industry. All these circumstances could be looked upon favourably.
But how about if you already have a mortgage and you’re looking to re-mortgage–you want to move house or just free-up some equity? Your first port of call should be your existing lender. They’re familiar with you, they know you’ve kept up your repayments (hopefully) and are far more likely to agree to new lending.
Whether you’re self-employed or an employee, your chances of success will be hugely improved if you’ve got a good deposit lined up or sizeable equity. In general, you should have at least five percent put away. So, if you’re looking at a property worth £250,000, a deposit of £12,500 would be the norm.
You’ll also be looked upon more favourably if you have a clean credit record. You can check your credit score for free at Experian or Equifax. There are ways to improve your credit score, too, such as paying your bills on time and keeping your credit card balances low. You can read more about this on Experian’s website.
One important thing to note is that lenders won’t just credit-check you personally–they’ll also run a check on your business. Make sure they don’t find anything untoward by paying off your debts and going through the report yourself with a fine-toothed comb. You want to make sure nothing will harm your chances of getting a mortgage.
There are three main types of business structure for the self-employed in the UK. Which one your business falls into can have an impact on your mortgage application.
As a sole trader, you’re a one-man (or woman) band. You keep all your profits. Ensuring you have accurate accounts should be pretty straightforward.Lenders will look at your profits when they assess your income. If you’re on self-assessment and HMRC works out your tax for you, you’ll want to dig out not only your accounts but also your SA302 form. That shows your total earnings and total tax due.
If you’re in business with another party, it could be as a ‘partnership’. When it comes to getting a mortgage, lenders will consider each partner’s share of the profit. It’s vital that your accounts accurately reflect how much money you made.
When you incorporate (set up as a limited company), your personal affairs and business affairs remain completely separate. As a limited company, you’ll need to name one director (or more) and sometimes a company secretary.Directors get a basic salary and dividends. Your bank or building society should take both these elements into account when considering a mortgage offer.
You’ll need to offer your lender at least two years’ accounts. It’s best to get these from a recognised chartered accountant, to give your lender confidence in their validity and accuracy.Take the time to go through the figures with your accountant, so you’ll be able to answer any awkward questions from your lender. That might mean offering a good explanation for a drop in earnings or for wild fluctuations.
If you can provide a plausible explanation, your chances of getting a mortgage will improve.Being self-employed has many advantages. Not the least, the potential to pay less tax than you would under PAYE, with the help of a little (perfectly legal) creativity from your accountant.But that drop in taxable income isn’t going to do you any favours when it comes to applying for a mortgage. That five-bed executive detached with double garage might end up being more two-up, two-down when reality bites. Take professional advice from your mortgage broker or accountant before you meet potential lenders.
Another issue could be if you’re a director of a limited company. Maybe you have profits that you prefer to keep in the business, instead of withdrawing them in the form of salary or dividends.
There are mortgage lenders that will look at retained profits when weighing up a mortgage application, but many don’t. This can lead to the bizarre situation where it’s tougher for company directors to land a mortgage than their staff. Get yourself a good mortgage broker who can find a lender happy to include retained profits in their assessment.
If you’re what banks call a high-net-worth individual, you might be wanting to borrow half a million or more. If so, get your broker to consider mortgage deals from upmarket private banks such as Coutts (bankers to Her Majesty, no less) or Hampden & Co. They’ll be more flexible about how they evaluate your income.
When you’re self-employed and looking for a mortgage, getting yourself a mortgage broker is a no-brainer. It won’t cost you anything except time, because brokers take their fees from the lender.
A good mortgage broker will know the best lenders to approach for the self-employed. They’ll also know which ones are happy to consider retained profits, which ones will be more forgiving of not having two years’ accounts, and where to look for the most favourable rates.
The consumer organisation, Which?, has a database of mortgage brokers on its website, as well as a handy mortgage calculator and other tools.So, if you’re self-employed in the UK and looking for a mortgage, here’s a short summary of what you need to do:
Good luck. And don’t forget to invite me to the housewarming party.
