Self-Employed Mortgage
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Self-Employed Mortgage (Part 1)
Michael Tilston talks to us about mortgages for the self-employed. Podcast recorded in June 2024.
Is it hard to get a mortgage if you are self-employed?
It all depends – it’s down to the level of income proof you need, which a lot of people are unsure about.When you’re self-employed, your income can go up and down over the year, which generally means it’s less straightforward than for someone who is just employed.
We’ll normally ask for one or two years of self assessment records – or three in some rare cases – just to show what you’ve earned over time. It’s normally two years, but it is possible to get mortgages with high street lenders based on only one year’s accounts.
It’s not overly difficult, and most self-employed people would probably want to have at least a year behind them – that way, they know what they’re borrowing is going to be affordable.
What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?
Not many lenders actually differentiate between the employed and self-employed. They will almost always offer the same products for both.In the UK a lot more people are self-employed now than a couple of decades ago. Lenders have kept up to speed with that, so you could get the same mortgages whether you’re self-employed or employed.
How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?
You definitely could. Most lenders like that two year track record, but some will quite happily accept one year of self-employment. They may ask for confirmation from an accountant that your income is likely to continue, or more likely for the most recent three months’ business bank statements. That will show that what you’ve declared as your earnings has been sustained over the last few months.My most recent year’s earnings were less than my average – will this affect my mortgage application?
That will affect things unless there’s a good reason for it. We’ve had quite a few cases recently where someone’s been on maternity or paternity leave, making their latest year lower. Lenders will take a common sense approach to that.
We’ve also had people who’ve been injured, for example, and have had to take a few weeks or months out. We have managed to kind of overlook that dip in earnings.
But if it’s a natural decline in business, that will have an effect. Lenders won’t want to use the higher average figure because they’d worry that it was unsustainable.
How much can I borrow as a self-employed person? How many times my salary can I borrow for a mortgage if I’m self-employed?
The same rules apply as for an employed person. It varies lender to lender, and we’ve got a very large panel of over 90 mortgage providers.It literally is anywhere between four times your income up to 5.5 or even six times – one lender has just come out with that [podcast recorded in June 2024]. Again, that’s the same for employed or self-employed. You could go way above what a lot of people assume you could borrow when you’re self-employed.
It really depends on your earnings and the level of deposit you’ve got, but it would generally follow the same rules as if you were employed.
What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?
It’s a normal deposit, be that a gift, savings or the sale of your previous house. There’s no real difference on that.I’m assuming the self-employment grant is the Covid grant from a few years ago. Lenders generally didn’t like you to use that – because, of course, that was not what the grant was designed for. It was there to shore up businesses that were affected by what was going on globally – it shouldn’t have been used as a deposit.
What are self certification mortgages and do they still exist?
I’m glad to say they don’t. Self-certification mortgages were very prevalent before the financial crash… I wonder why?!It used to be that you could just state that you earned a certain amount and the advisor or lender didn’t check that income. Someone earning £1,000 a month could ask to borrow £500,000 and would just have to sign a form to say they could afford it.
You can see why a lot of people ended up in trouble. Interest rates did fly through the roof which obviously was a huge contributing factor. So no, they do not exist and for good reason.
How will I be assessed as a self-employed mortgage applicant?
You’ll need to prove either one year or two years’ self-employed income. Lenders will look at different factors.Some will look at your personal self-assessment – which means your salary and dividends if you’re a limited company director, or net profit if you’re a sole trader or a partnership. If you are a limited company director, we have also got lenders who will look at using your net profit plus salary from your business.
It’s quite common for someone to leave a lot of earnings in the business because they don’t need the income. They don’t want to pay income tax on it by taking it out of the business. Some lenders will look at that and use that higher income amount, as if they had withdrawn that money out of the business. You might therefore be able to use £80,000 as your income instead of £50,000, which would mean you could have a considerably larger mortgage.
Will IR35 affect my mortgage application?
For those listening to this who don’t know what IR35 is, it’s where the government has changed the rules and regulations around how people are classed as self-employed or employed.If you’re self-employed and you effectively contract with one company, and they supply all your equipment and dictate where and how you work, the government considers you to be more employed than self-employed. Therefore they are going to tax you as if you’re employed and make you become employed by the institution you work for.
Employers like the NHS were part of this, where contractors working for them had to shift over to being employed. That of course may change your tax status – although it shouldn’t affect your mortgage application.
Just let your advisor know, and we could look at which option is going to be right for you – to treat you as self-employed or employed if you’re transitioning over.
How will a lender calculate my self-employed earnings?
It’s going to be down to your self-assessments or company accounts. Of course, it’s not just the earnings – they’ll work out your outgoings too, to make sure that whatever you’re trying to borrow is affordable, exactly as they would if you were employed. It’s just different paperwork.What documents will I need for a self-employed mortgage application?
The key things are those self-assessments, which used to be known as SA302s. They’re now commonly known as tax computations or calculations. You will also normally need your tax year overviews alongside those.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.
Self-Employed Mortgage (Part 2)
Michael Tilston is back to continue the conversation on mortgages for the self-employed. Episode two of two, recorded in June 2024.
Do self-employed people have to pay higher mortgage rates?
No, there’s only a handful of lenders who might charge a small percentage more if you’re self-employed. Most don’t. It’s the same product range across the board, I’m glad to say.Can I get a joint mortgage with a self-employed worker?
You can indeed and it’s very straightforward. It’s something we do all the time – it’s just going to be down to what they earn.I’ve recently gone from being employed to self-employed – how soon until I can get a mortgage?
It does depend on what sector you’ve been working in. Broadly speaking, you would need at least a year and in some cases two, depending on which lender you go to. But there are some niches where you could potentially get a mortgage almost instantly – especially in the professional sector.
For example, a doctor might go from being an employed doctor to locuming, which is generally self-employed, or perhaps they’ve bought into a GP practice. It’s the same for barristers or solicitors who have just become a partner in a firm.
That’s definitely something we could look at. Recently we looked after a pharmacist who moved from employed to self-employed just a month or two before, and we could get them a mortgage.
Also within this are CIS workers, who are self-employed but they also get pay slips. We could treat them as either employed or self-employed – whichever is going to be right for them. If you’re unsure, just get in touch. It’s a two minute conversation for you to understand what’s going to be possible for you.
Can I get a guarantor mortgage if I’m self-employed?
The term guarantor isn’t really used much anymore. Generally speaking these mortgages are now called Joint Borrower Sole Proprietor – it’s the same thing under a different name.You could get one of these if you’re self-employed. You might use a Joint Borrower Sole Proprietor mortgage if you’re more newly self-employed, where your earnings are going up but you might not have proof of that just yet.
If you have a family member – or a friend, in some cases – that could potentially step up and help boost the income side, that may help you get a mortgage.
Can I use shared ownership if I’m self-employed?
Yes – with shared ownership it’s the same as if you’re employed. You could definitely do this as long as you have the proof of income.Can I get a Buy to Let mortgage if I’m self-employed?
Yes, you could get a Buy to Let mortgage if you’re self-employed – simple as that, really.If you’re self-employed, a lot of lenders will still ask for some proof of income. More than anything, that’s just to check which tax band you’re going to end up in. They’ll know how much they could lend you based on how tax has changed on mortgage payments.
How does remortgaging work if I’m self-employed?
It sounds like the self-employed community worries when they go from being employed to self-employed – but there’s no need to be concerned. Remortgaging works exactly the same.The Lender looks at income and outgoings to confirm the new mortgage is affordable and then we go from there.
Will being self-employed with bad credit affect my mortgage deposit?
This would be the same if you were self-employed or employed. For anyone with particularly bad credit, a lender may ask for a bigger deposit because they would be taking on a higher risk. They would want more ‘skin in the game’.If you’re putting in 20%, for example, they’re going to be more willing to lend – it gives them some confidence that you’re not going to walk away from a property with that level of deposit in it.
Being self-employed with bad credit is no different – having bad credit affects you across the board for all mortgages, employed or otherwise.
How can I get a mortgage as the director of a limited company?
Quite easily – it depends on your shareholding, and this is something we would of course go through if someone contacted us.I personally look after a lot of directors of limited companies, and there are more options available. You could use salary and dividends, which is what would normally show on your self-assessment. This is just how most directors of limited companies are paid.
You’ve also got the option to use salary and net profit within the business, again depending on your percentage ownership. If your business made a profit of £200,000 for the latest tax year, your salary was £10,000 and you own 50% of said company, we could potentially use £110,000 of income for your mortgage application.
It’s slightly different because you’ve got a couple of options you could use. But you could get a mortgage as a director of a limited company.
Is there anything else I can do to help my chances of getting a self-employed mortgage?
Work as hard as you possibly can and earn as much money as possible! The more you earn, the more you could borrow.Make sure your credit is clean – again that’s exactly the same for the employed and it’s something we say across the board.
It’s less about your credit score, and more about what’s going on with your credit file. Make sure that all your payments are up-to-date, and there’s no cheeky little credit card in the background that you’ve forgotten about, quietly racking up charges from the lender.
We’ve seen lots of applications get kicked out because of daft little things like that. You might have only owed the bank literally £5. Or you’ve moved house and forgotten to tell your mobile phone company. They’re sending bills to the wrong address and then they put a CCG on your file. So keep an eye on your credit record.
Obviously with your deposit, the more you can save the better. Again it shows a lender that you’re able to save money and you will own as much as possible of the property.
How can a mortgage broker help me with my self-employed mortgage application?
It’s always worth speaking to a mortgage broker in all scenarios – not that I’m biased! You might decide to really maximise your earnings, and walking down the high street you’re not going to know which lender is going to do what.On a high street, there’s probably only about six banks left – if they haven’t shut all the branches. But we’ve got over 90 lenders on our panel and we would do all that research from our desk. We also know which lenders might take your most recent year – that could be absolutely key.
For example, if you had an OK year last year, earning perhaps £30,000, and this year was £39,000, using that latest year means you could borrow a bit more than if you use an average. We would know which lenders to go to for that.
It could potentially mean you could borrow an extra £25,000 and buy your forever home. If two of you are self-employed that could make a huge difference.
A mortgage broker’s knowledge is key to getting you where you want to be. This is what we do day in, day out. It’s why we’re here. It’s our job to know these things and it’s what makes us worth it.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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.