Joint Mortgage Self-Employed
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Joint Mortgage Self-Employed (Part 1)
James Best explains how a joint mortgage works if you are self-employed, in part one of a two part episode. Podcast recorded in October 2024.How does being self-employed affect your eligibility for a joint mortgage?
It doesn’t, in many respects. If you’ve been self-employed for at least a year, it won’t affect your ability to get a mortgage. It really comes down to your individual circumstances as to whether a mortgage is suitable. So pick up the phone, speak to your mortgage broker and let us see what we can do for you.
What documentation is typically required for self-employed individuals applying for a joint mortgage?
This is where the fun begins. When you’re self-employed, lenders typically want a bit more information. They need to look over a longer time period for self-employed clients in comparison to employed clients.
A bit more documentation is needed, and that can vary depending on what type of self-employment it is. For example, for sole traders and those in partnerships, we need at least two years’ HMRC tax calculations and the corresponding overviews.
For limited company directors, we can use the same information as sole trader and partnership clients, but this only shows your personal income taken from the business. It can help to get the latest two years’ full, finalised accounts to see how the business is doing in terms of turnover and profit levels.
Not all directors take all of their income out of their business, so it’s good to get an overview of the whole financial picture to know where to best place you.
With all self-employed individuals, in addition to the usual three months personal bank statements, lenders want to see three months’ business bank statements to get a snapshot of what’s been happening in the last few months.
Are there any specific requirements or restrictions for self-employed applicants considering a joint mortgage?
Whether it’s a joint self-employed or a sole self-employed mortgage, the criteria is the same. There is no real disadvantage of having two self-employed individuals compared to, say, a self-employed individual and an employed one.
As a self-employed client, you need a minimum of one year’s full trading. We need either one full year’s HMRC tax calculations or one full year’s trading accounts for you to be considered for a mortgage.
That could be restrictive if you’ve only just started and you don’t have a full year, or if you started trading part way through the tax year. Perhaps you haven’t quite got your full first year of accounts.
But you don’t need to wait for two or three years to be considered for a mortgage. Lenders are a lot better now at interpreting self-employed clients and their income. The good news is it can be based on one year, provided you’ve got prior experience within that same industry, perhaps in an employed role or a different business.
How can self-employed individuals improve their chances of being approved for a joint mortgage?
It’s all about getting ready and prepared in advance. We’re now in October 2024, and you don’t need to do your self assessments for the tax year ending April 2024 yet.
But for mortgage purposes, it can be beneficial for you to do those early. If the figures are the same or higher, it can improve your chances of getting a mortgage approved or let you borrow more and afford a nicer property.
I always say to self-employed clients that if you’re nearing the end of your trading year and meeting your accountant to go through the figures and see what income you can take from the business, get in touch. We can have a look at that and see how that affects your mortgage options.
Then you’re getting the best advice from the accountant and it also tallies up with your mortgage objectives. That applies both if you’re coming up to a remortgage or you’re buying a property.
Can self-employed applicants include their spouse or partner in a joint mortgage application?
Yes. Any income that the spouse or partner earns can be used in addition to your own income, to support the mortgage application.
If, for example, a husband and wife or two partners are employed through the same business, if it’s long standing and a legitimate source of income, that can be used. You both being self-employed won’t put you at a disadvantage, because all the income can still be used.
Are there any additional considerations for self-employed individuals applying for a joint mortgage, compared to the employed?
Lenders will explore in more detail when assessing your application, including a snapshot of the last three months’ activity on your business bank statements. So, if you’re coming up to a mortgage review or looking at buying, trying to get those bank statements in the best possible light would certainly be helpful.
As a minimum, they will look at the last two years’ income figures. If your turnover is going up, fantastic. Lenders may want to get an understanding of the nature of that growth and how that’s going. If the figures are reducing, we need to understand why. We need to demonstrate to the lender that that trend isn’t going to continue and things are going to stay at the same level or improve.
The more we understand about self-employed individuals’ circumstances, the better placed we are to package the application and alleviate any concerns from lenders.
Another consideration is if you’re relocating and you’re self-employed. It will depend on the nature of the business – I know lots of things can be done from home these days – but if you’re relocating across the country, how will it affect your business?
It could be that a lot of your business is local to you, because you’ve built up a track record and reputation in that area. When relocating, you may effectively have to start all over again. Underwriters will check this detail and ask questions about what will happen with your clients. How is the income going to continue if your clients are 250 miles away?
What are the disadvantages of applying for a joint mortgage as a self-employed individual?
There are more advantages than disadvantages in being self-employed. That’s the headline, but there are a couple of risks to be aware of.
Other than the risks of relocation that I’ve mentioned, being employed is beneficial in terms of maternity pay and the evidence needed for a mortgage. Lenders just look at weekly or monthly pay slips. Whereas if you’re self-employed and you’ve taken time out to look after children, that’s likely to affect your business levels.
There’s no workaround for that, unfortunately, when you’re self-employed. So where possible, try to plan that around your mortgage objectives. Hopefully that can be absorbed within the business.
The other thing is that employed people typically pay into a company pension, so if you’re slightly older and you need your mortgage term to extend beyond state retirement age, paying into a pension can help lenders feel comfortable.
When you’re self-employed, unless you’ve got your own private pension, borrowing into retirement could be quite problematic. That can be another disadvantage.
What are the advantages of joint mortgages for the self-employed?
There are plenty of advantages. An important one is that if you’re a limited company director and you’ve made profit, you can effectively choose what you’re taking out of the business.
Another massive benefit is that we can often take the operating profit either before or after tax, plus a director’s salary,
An accountant will often recommend that you only take out what you need and leave the rest in the business. From a mortgage point of view, we can use that retained profit to give you more income, rather than use the bare minimum that’s shown on your tax calculations. That’s going to give you a much lower borrowing figure.
Also, if you had a recent uplift to your income, we do have lenders that just look at the most recent year and base calculations on that. Perhaps, you recently became self-employed and had a slow start getting things established, and then a really good second year’s trading because all that hard work paid off. Certain lenders will accept the most recent year rather than the average of both, which can work very positively for your mortgage borrowing.
There are other advantages. Lots of self-employed clients I see might take personal loans out for company vehicles etc. as personal loans typically offer better terms than a business loan. If your accountant can justify that being run and paid through the business, that commitment can be excluded, which is again good news for your mortgage.
Meanwhile, if you are employed and you’ve got a personal loan, the lender’s going to include that as a commitment. Also, another benefit of self-employment can be that your accountant can help us present your circumstances in the best possible light.
How can self-employed individuals navigate potential challenges or obstacles when applying for a joint mortgage?
Get all your documentation and information ready beforehand. Speak to a qualified mortgage broker, as they have the widest choice of lenders and can put you in the most suitable possible position.
Go through all your circumstances with your advisor, because the more I can understand about you and your business, the better. By knowing how it all works, what you’re doing and what your plans are, it’s easier for me to package your case in a positive light to the underwriters, to get your application accepted.
Preparedness is the big message here, with regards to navigating those obstacles.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker.
Joint Mortgage Self-Employed (Part 2)
James Best continues the conversation on joint mortgages for self-employed applicants. Episode two of two, recorded in October 2024.
What factors do lenders take into account when assessing the affordability of a joint mortgage for self-employed applicants?
Other than the usual income verification, there are a few other things lenders take into consideration when looking at the affordability.
They like looking at business trends, which is why the majority ask for two or three years’ books where possible. It means they can get an idea of turnover and profit over a longer period of time, and establish whether these are increasing or decreasing. If there are any changes, they’re likely to want to know the reasons and what’s happening within the business.
They look at recent business bank statements, too. Your accounts could be a year old, but your bank statements will show the latest trends in money coming in and going out. Lenders pro rata that three-month turnover and check it against the turnover in your most recent books, to see if the business is continuing in the same line or improving.
If there is any difference between those levels of turnover, we need to explain why – there are lots of reasons that could be higher or lower.
They would also check the income being drawn from the business and whether it can be supported over the long term. With limited companies, where there are dividends and net profit, they want to make sure that the income drawn from the business is sustainable over the whole mortgage term.
Lenders also check Companies House to see the year the business was established, the directors and the shareholdings. They will probably search the business online to see what’s going on there as well. With a lot more information at a mortgage company’s disposal, they don’t just look at the paperwork we provide – they check other sources as well.
Are there any specific types of joint mortgage products designed for self-employed individuals?
Not as such, other than niche lender products, the majority of mortgage deals out there are as available to the self-employed as the employed. The self-employed can benefit from exactly the same terms as an employed client as well, which is really good news.
Can self-employed applicants benefit from any government schemes or initiatives when applying for a joint mortgage?
There aren’t any schemes that exclude the self-employed. First Time Buyer deals and government schemes are open to the self-employed as much as anyone else, which is good.
What should self-employed individuals know about the income assessment process for a joint mortgage application?
In most circumstances, mortgage lenders will either take an average income figure or the latest year’s figure, whatever is lower. Sometimes they can take the higher figure if the latest year is really good, provided we’ve got a plausible scenario to explain it and your business bank statements show an upward trend that’s likely to continue.
If the figures have reduced, again we need to know why. Perhaps you have taken parental leave or there’s been a period of reinvestment, which is why the figures are lower. It’s about getting a handle on the whole situation and understanding what’s going on with the business.
If you are a self-employed director, we can look at either your self-assessment – the income that you take from the business – or the income drawn from the finalised accounts. That can benefit you. If one figure looks better than the other, it’s down to your broker to package it up and pick the one that is the most suitable.
How do different schemes affect joint self-employed mortgages?
There are different schemes out there for the self-employed, in terms of how they earn their income and lenders do accommodate these.
One that we often come across within our business are CIS (Construction Industry Scheme) contractors. They’re treated as though they are PAYE because tax is deducted from their pay at source. Provided they’ve done that for a certain period of time, we can look at the gross figure on those statements, rather than two years’ figures – which is a massive advantage.
Other clients may be day rate contractors, which is quite common within the IT industry. If you are a day rate contractor, you are self-employed and you do your self-assessment, we can often take your day rate figure rather than what goes through on the HMRC assessment.
There can be two wildly different figures in terms of your income, which can make a material difference to your mortgage options.
So if you do fall into one of those camps, we’d love to hear from you – we deal with these types of clients all of the time. As brokers we often hear stories where someone has spoken to their bank which can’t help, or they’re given a figure that’s really low.
We look at the circumstances and can usually get a new borrowing figure that enables them to achieve what they want to do. There are lots of different ways to assess income, so get in touch and we can use that to your best advantage.
How does the length of self-employment history impact the likelihood of being approved for a joint mortgage?
As long as you’ve got one year’s worth of trading and accounts under your belt, you stand the best chance of getting accepted.
Ideally, your one year would be in the same field of industry as a previous role. You need two or three years’ total history within that field. The shorter the period of time, the fewer the lenders we can approach, but even some high street lenders will consider one year’s history.
So don’t feel that all the doors are closed. If your bank or building society says no, the chances are we can find a solution for you.
If you’re self-employed and you’ve recently started work under the CIS scheme or as a day rate contractor, you may not need a track record. We could look at you without needing the standard two years under your belt. So if you’ve got that year’s experience or it’s under those schemes, get in touch with us.
The challenge here is that if it’s a joint mortgage and each of you is self-employed, it applies to both of you. It doesn’t mean you have less chance of getting your application through and accepted, it just means that more of that information and criteria applies.
Are there any self-employed friendly lenders or mortgage brokers you recommend for joint mortgage applications?
Hopefully I’ve sounded friendly enough over these podcasts, and people do feel welcome to reach out.
But ultimately any broker who has a good handle on the whole market and experience in the industry should be able to help you out with your application.
If you’re self-employed and you’re worried about how your circumstances will be perceived by mortgage lenders, get on Google and look at reviews and recommendations – that’s a great way to find a suitable broker to look after you.
In terms of the lenders, as I mentioned before, every lender will deal with a self-employed application. You’re not excluded by any lenders, unless we’re looking at very niche circumstances. The majority of the lenders will be able to help you.
However, as a broker with 15 years’ experience dealing with self-employed clients, we can really help if something about your circumstances is a bit quirky. Perhaps you’ve moved to CIS or your income has changed, and you want to portray your circumstances in the best possible light.
We know which lenders and underwriters are really good at looking at accounts, which ones will accept information from accountants, and who is best in all those niche areas we’ve spoken about.
We don’t have favourite lenders, however some are better placed at dealing with those niche applications. If you feel you do fall into that space, get in touch, because we will be able to find a solution for you.
Can self-employed applicants include income from multiple sources in a joint mortgage application?
Yes, they can. It’s the same as with employed clients, if you have multiple streams of income, you can use them.
Whether you’re self-employed and have an employed job as well, or you work part-time doing two different things, the main thing to consider is how long those income sources have been active. The longer standing they are, the more comfortable an underwriter will be with them.
But if you’re self-employed and you’ve recently started an employed part-time job, that potentially could cause complications. With something quite recent, the lenders won’t have enough history of those employment sources.
So it can be used, but it needs to be longstanding and likely to continue throughout the term of the mortgage. The reason is that we’re making an assessment on your ability to manage the mortgage through thick and thin. We need to make sure we are giving responsible advice as a mortgage broker.
What else do we need to know about joint mortgages for the self-employed?
I hope I’ve given you enough cause to say that mortgage brokers are worth their weight in gold. We have access to a huge panel of lenders and lots of experience in dealing with the self-employed.
A mortgage broker is genuinely the best person to help you and give you the right advice with regards to your self-employed mortgage journey.
If you only go to your bank or building society, you’re limiting your choices – not only in mortgage deals but also in lender criteria. It’s much better to shop around and make sure you’re getting the best advice.
Speak to a mortgage broker and explain all your circumstances, because we will definitely be able to present your information in the best possible light and get you the most suitable mortgage terms.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.