Mortgages and Being Self Employed

 In Contractors & Freelancers

Getting a mortgage when you’re self-employed can be tough, but don’t worry – if you get your finances in order, there are still options available.

There are many pros and cons to being self-employed, but one of the biggest downsides has to come when you try to secure a mortgage. Getting onto the housing ladder can be difficult at the best of times, but when banks see that you work for yourself, many of them will be searching for reasons to look the other way. However, while getting a mortgage may be more difficult, that doesn’t mean it’s impossible.

It’s not hard to see why banks would see self-employed customers as risky. Income is unreliable, you have none of the protections regular employees enjoy and, even if business has been good in the past, there’s no guarantee it will continue to come in.

Of course, you could also argue in the other direction. Self-employment is not necessarily a more volatile option. Employees can be made redundant, for example, the company they work for could go under or dispense with their services. A successfully self-employed person, with multiple clients and a reliable income stream, could be said to be in a more stable position. He or she would have several clients to fall back on and no employer to make them redundant. In short, there are many more things which would have to go wrong before the money runs out.

Even so, most banks will require you to jump through a number of additional hoops before approving a mortgage.

Getting a mortgage

First, let’s do a little myth busting. You may hear people talking about self employed mortgages or mortgages specifically aimed at self-employed people. There aren’t specific products. You will simply be applying for a conventional mortgage as a self-employed person.

Before 2008, self-employed people and contractors had the option of self-cert mortgages. These required no proof of income. Instead you just had to tell the bank how much you earned and they would arrange the mortgages for you. Unsurprisingly, these were open to abuse. They became known as ‘liar mortgages’ and were soon banned.

Today, therefore, you will need to provide evidence of a strong and sustainable source of income. In general, lenders will look for the following:

  • Two to three years of completed accounts.
  • A good track record of sustainable work.
  • A crystal clean credit history.
  • A healthy deposit.

In addition, they will also regard you more favourably if you employ an accountant. Having your accounts professionally prepared will reassure your lender that they are accurate. Many will want that accountant to be certified or chartered, so check these terms when choosing a potential mortgage provider. You can find a directory of chartered accountants in your local area via the ICAEW website. Many accountancy firms also offer a range of services for self-employed people and contractors. They can be invaluable in managing your day-to-day finances and offering advice on the best structure to use.

If you do not have these accounts, don’t panic. Many lenders will still work with you as long as you can show proof of a sustained track record of work and that you have contracts lined up in the future. If you’re a contractor who has made the break from employment to work in the same industry this will also work in your favour.

When assessing your application, the lender will base calculations on your average profits over the past few years. Ideally, they will want to see an upward trend suggesting the future will be even healthier than it is now.  

Your work status

Because you are self employed you should be prepared to face more scrutiny on your finances. You should make sure you can understand all aspects and be capable of answering any questions on them. If they show a dip in income for a period of time, you will probably be asked to explain it.

Requirements may also differ depending on the structure you work under.

  • Sole trader: If you submit an annual tax return to HMRC, your lender may want to see an SA302 tax calculation showing how much tax you’ve paid for the last four years.
  • Partnership: The lender will want to see each partner’s share of the profits. Make sure your accounts show exactly how much money went to you.
  • Limited company: If you’re structured as a limited company, you may receive money both as an employee and through dividends as a shareholder. Make sure your lender takes both these income streams into account when assessing your application.

There is one more thing to watch out for. When you’re self-employed, you may have looked at ways to legally reduce your profits to ease your tax burden. While this may help you in the short-term, it can return to bite you when the time comes to apply for a mortgage.

The good news is that things are picking up. That’s partly because more people describe themselves as being self-employed. This is a growing market which financial providers can no longer afford to ignore. They are also becoming much more sophisticated in the way they assess income and affordability. The bar will be raised much higher if you’re self employed and you’ll have to adopt a professional approach to finances, but if you can prove you’re a reliable bet there are still some good deals available.

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