Getting a Mortgage if You’re Self-Employed
Post-credit crunch, it has become trickier for self-employed workers, freelancers and contractors to get a mortgage – but it’s not impossible.
If you work for yourself, and are looking to remortgage or buy a new home,find out how you can get the right mortgage for your circumstances with this guide.
What You Need to Get a Mortgage
The key change for self-employed workers is the need to prove your income to any mortgage lender you apply to. Most will want to see at least two years’ accounts or tax returns. The more accounts you can show the better.
Two years’ accounts
A track record of regular work
A healthy deposit
A good credit history
How Your Business Set-up Affects Your Mortgage Chance
When you set up your own business you have a choice of three main business structures to choose from. Which one you pick will influence how lenders view your income.
As the name suggests, sole traders are one-man bands. Keeping records and accounts is fairly straightforward – and you get to keep all the profits.
It’s these profits a lender will look at when assessing your income. If you do your tax by self-assessment and get HMRC to calculate it for you, you may get a form called an SA302, which shows the total income received and total tax due. Your lender may want to see this alongside your accounts, so dig it out and have it ready.
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner’s share of the profit. So, make sure you have accounts that show exactly how much money you made so your potential mortgage lender can easily see your annual income.
Setting up a limited company means you keep your business separate from your personal affairs. A limited company will have at least one director and, in some cases, a company secretary.
Directors normally pay themselves a basic salary plus dividend payments. Make sure the lender takes both these elements of your income into consideration when assessing mortgage affordability.
Proving Your Income
In order to prove your income you will need to be able to provide your lender with at least two years of accounts. Get these put together by a chartered accountant so your lender can be confident they are accurate. But make sure you understand the figures and can talk the lender through them if asked. For example, if you have a dip in your income at a certain point, be able to explain what happened and why. If you can clearly explain fluctuations it is a lot more impressive than if you get flustered when questioned, and therefore increases your chances of getting a mortgage.There are a couple of common problems you may come up against when proving your income. Firstly, in the past you, and your accountant, will probably have been keen to legally reduce taxable income in order to pay less tax. However, this could count against you when applying for a mortgage as suddenly you need to show the biggest income possible.
Get advice from your accountant and a mortgage broker before you apply
Secondly if you’re a director of a limited company, you might have profits that you choose to retain in the business, rather than take out as salary or dividends.
Some mortgage lenders consider retained profits when assessing an application, but some don’t. In some situations this can mean company directors find it more difficult to get a mortgage than their employees. A mortgage broker will be able to help you find a lender that will take retained profits into account. You can find a mortgage broker here.
If you are looking to borrow more than £500,000 ask your broker to look at mortgages offered by private banks such as Coutts or C. Hoare & Co. Private banks are more flexible about what they take into account when assessing income, for example they will include other assets and incomes.
It’s a good idea to take advice from both your accountant and a mortgage broker before you apply for a mortgage.
Finding a Mortgage
A mortgage broker is invaluable when you are self-employed. They’ll know which lenders are willing to lend to self-employed, which take retained profits into account, if any lenders will accept less than two years of accounts and, most importantly, who will offer you the best rate. You can find a list of reliable, good value brokers here.
If you don’t want to use a broker you can compare mortgages and find the lowest rates with our mortgage tables.
The Dos and Don’ts of Self-Employed Mortgages
Do. Keep up-to-date records and accounts.
Do. Hire a certified or chartered accountant to prepare your accounts and tax return.
Do. Speak to a mortgage broker about your options.
Do. Speak to your current lender if you’re self-employed and want to remortgage or move house.
Don’t. Minimise your income too much for tax purposes – it will affect your chances of getting a mortgage.
Don’t. Assume it’s impossible to get a mortgage if you’re self-employed – it’s not.