Many self-employed people think they can’t get a mortgage – or it’ll be really difficult. There are, in fact, lots of options available. The best way to make sure your don’t get rejected for a loan is to seek independent self-employed mortgage advice.
Self-employed incomes aren’t straightforward. Annual fluctuations, unexpected expenses or global pandemics slashing income, and new revenue streams all mean it’s tricky for mortgage providers to assess whether you’re a lending risk. However, self-employed mortgage advice from a qualified, independent broker will guarantee that you apply to the right lender that offers the best mortgage deal.
Of course, the longer you’ve been trading and have an income that increases year-on-year, the better. However, it IS possible to get a self-employed mortgage even if you’ve only been trading for one year or your recent income is less than in previous years. It all depends on a wide range of factors, such as the size of your deposit, your loan-to-value requirements, your credit score, and your regular household bills and outgoings.
As independent mortgage brokers, we offer unbiased self-employed mortgage advice to help you get the best deal possible. We have access to over 100 mortgage providers – including deals not available to customers that go direct. With our help, you’ll get a tailor-made self-employed mortgage that you can afford even with a fluctuating income.
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Mortgage lenders will consider you self-employed if you
- Are a sole trader, i.e. you run your own business as an individual and are registered as self-employed with HMRC.
- Have a minimum 20-30% share in a limited company. Whether or not you are a director of this company, you withdrawing a salary doesn’t make you an employee in the eyes of lenders.
- Are a partner in a limited liability partnership (LLP) and submit a tax return based on your share in the LLP.
Freelancers and contractors normally fall into one of the above categories and would, therefore, be self-employed.
Due to the IR35 changes in recent years, a lot of contractors have switched from working through their limited company to working through an umbrella company. As umbrella companies usually deduct tax and NI at source, the contractors’ position would have changed from self-employed to employed as a result.
The number of people who are self-employed as sole traders, freelancers, limited company directors, LLP partners or contractors is increasing. Yet, if you are self-employed, you may still find it difficult to get a mortgage.
On one hand, your self-employed accounts are tax-efficient, but on the other hand, they may not reflect how much disposable income you actually have.
You may have heard that you would need at least 3 years accounts and a huge deposit to secure a mortgage, so feel that you won’t go far with only 1-year self-employed history and 5-10% deposit. That is not true. You can get a mortgage with only 1 year’s accounts and you can get a 90-95% mortgage in certain circumstances.
Additionally, as a freelancer, you may not have a regular income or as an LLP partner (e.g. doctors, solicitors) or you may not have much control over the accounts which can also impact your mortgage affordability.
The good news is that many lenders recognise how self-employed people work and do offer flexible self-employed mortgage criteria. We can also get policy exceptions from lenders dependent on your situation. The first step is to get in touch so we can check your self-employed mortgage options.
The self-certification mortgage, which once permitted self-employed people to obtain a loan without needing to prove their income, disappeared after the 2008 credit crunch.
Nonetheless, self-employed people can still get a mortgage.
Lenders will assess your affordability exactly as they do for salaried employees – i.e. based on your pre-tax income. The difference is that your income can only be summed up for tax purposes once a year, so you need to wait until your tax return is done.
You CAN get a mortgage, if
- You have only been trading for 1 year;
- Your latest year shows lower income than the previous year(s);
- You only took out the minimum salary and dividends to minimise your tax liability;
- Your income hasn’t been consistent during the year (e.g. by being a freelancer);
- You have recently changed from being a sole trader to a limited company director or vice versa;
- You have recently become a partner in a solicitor firm after being their employee;
- Your contract is on zero-hour or commission-only basis;
- As a contractor, you have been working on an hourly or daily rate basis for less than a year.
However, to give an exact figure of how much you can borrow, we will need to look at your outgoings, credit commitments, credit history and other aspects as well.
Most commonly, lenders will ask for tax calculations (formerly SA302) and tax overviews.
The tax calculation is a 1 or 2-page summary of your self-employed profit plus any other income and also shows the tax you have to pay.
The tax overview is a 1-page summary of the tax liability and how much of it you have already paid.
Sometimes, lenders ask for an accountant reference either in addition to the above or instead of tax calculation and tax overview.
Finally, self-certification, when you certify your own income instead of providing proof of it, is not a valid form of proof of income any more.
For further details and to check how much you could borrow, contact us and we’ll be happy to help.
Some mortgage lenders assess your self-employed income as an average of the last 2 or 3 years, others just take the latest year income.
More importantly, you can also get a self-employed mortgage with only 1-year accounts from certain lenders.
However, lenders normally only accept full tax year income, not partial years. For example, if you became self-employed in June, then your first tax return will only show self-employment for the June to March period instead of the full tax year of April to March. In this case, lenders will likely ask that you wait until you have a full year (Apr to Mar) self-employment.
There are over 130 mortgage lenders on the market currently, many of whom are only accessible via mortgage brokers or offer different (normally more flexible) terms via brokers. It is our job to know or check how they assess your income and how their individual mortgage calculators work to get you the maximum mortgage loan amount and the best mortgage deal.
We have the tools (e.g. broker only comparison system), the knowledge – through training and experience – and the contacts to find you the most suitable lenders and deals based on your circumstances. We can even get policy exceptions in certain situations.
If you need a self-employed mortgage and have been asked for 3 years accounts and a hefty deposit, then call us for a free no-obligation assessment of your situation. If others said “no”, we may surprise you regarding how much you could borrow.
If you buy a house, then building insurance will be mandatory to ensure that in case the structure is damaged (e.g. by fire, flood or movement), the insurance will cover at least the mortgage amount.
Nothing else is compulsory, but of course, it makes sense to cover costly unexpected events.
Contents insurance can pay for replacing your personal belongings if someone burgles your home, there is fire, you accidentally drop your new flat screen TV…and the list goes on.
If you’re planning to rent out your property then you should consider getting landlord insurance. Landlord insurance protects you as a landlord from risks associated with your rental property. It usually includes buildings and contents insurance, but can also include rental-property specific covers such as protection against loss of rent, and tenant default. It can also cover legal fees and compensation for damage or injury to the tenant due to the property.
Life insurance is a one-off payment if you were to die during the mortgage term, so the insurance can settle your mortgage. This would allow your family to stay in the property without worrying about mortgage payments at an already stressful time.
Critical illness cover
Critical illness cover would give you a lump-sum if you had a serious illness like cancer, heart attack or stroke as well as dozens of other conditions. This payment may or may not settle the mortgage, but it can help pay for treatment, let you take time off work while recovering or alter your home, if necessary.
Because you are self-employed, you wouldn’t have insurance through work, so it makes sense to look at your options. With a classic example, you are the hen laying the golden eggs, so if you fall ill, there may be no one to provide for you and your family.
Out of the options available, perhaps income protection is the most important one for self-employed people. It is designed to give you a monthly income for some time in case you can’t work due to an accident or illness for a long time. This covers mental health issues as well.
Of course, all the insurances come with terms and conditions, optional features and your medical history can influence your options.
To find the right insurance cover that fits within your budget, speak to our team today. We can compare the whole market, find the most suitable cover and apply on your behalf free of charge.
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We don’t think you should waste time filling out forms that aren’t relevant to your mortgage needs.
That’s why we like to speak to you first and build a personal relationship, so you can remain assured you’re getting the best service.
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