More than 5 million people are self-employed in the UK, according to the Office of National Statistics. And that is a figure that’s likely to keep rising.
For many, working for yourself in the ‘gig economy’ is an answer to long-term unemployment.
But some people who have just taken the step often worry that it will mean getting a mortgage will be a nightmare.
It is a myth that self-employed people can’t get a mortgage. It is also untrue that there are special mortgages for those who work for themselves that attract higher interest rates.
The big difference is that it can be harder to prove earnings as they can fluctuate. And it can also take a little longer to get all the necessary paperwork together.
It is understandable because lenders need to be happy that the applicant is earning enough. And they have to be confident that they can sustain the level of earnings to afford their mortgage.
If you are self-employed and looking for a mortgage, here’s what you need to know.
Prove your income
The longer you’ve been self-employed it is potentially easier to secure a mortgage. You will have more choice of lenders if you have 2 years of accounts, although 3 are better.
Most lenders insist your accounts are prepared by a chartered or certified accountant.
Lenders also ask to see the income you’ve reported to HMRC and what tax you’ve paid. You will need your SA302 form or a tax year overviews.
Both are available from HMRC and you can access them yourself if you are registered on the HMRC Gateway. If you aren’t, your accountant can access them. Some accountants may charge to do this.
I don’t have 2 years of accounts
If you haven’t been employed long enough to have 2 years of accounts, don’t worry. It may be more difficult but, again, it’s not impossible.
We have access to over 100 lenders so can probably find one that will be suitable for your needs.
As with any mortgage application, make sure you have done your homework regarding credit. This will form part of your application and if you have a good credit history it will help.
This is when it’s a good idea to speak to a mortgage broker like The Mortgage Dog. We know what will be required so we’ll make sure everything is in order before we approach any lender.
Self-certified mortgages
You may have heard of these mortgages, which allowed the self-employed to certify how much they earned. But these were banned in 2014 due to worries about people being accepted for mortgages they couldn’t afford.
Your status
How you run your business is an important factor when applying for mortgages. Are you a sole trader, a contractor, partner or company director?
Lenders view you as self-employed if you own more than 20% to 25% of a business that you earn your main income from.
Sole traders are assessed differently depending on income changes. If it is increasing, lenders usually take the average income from the past two or three years. If it has fallen, they are likely to use the latest and lowest figure.
Contractors who earn a day rate usually multiply the rate by the number of working days in the year. They will also look for at least a year’s contract history. And you may also be asked for evidence of upcoming contracts.
Limited company directors might be assessed using two methods: the first calculates their income based on salary and dividends. The second way is to assess the director’s salary in addition to retained profit in the company.
Some dos and don’ts
If you’re self-employed you need to put a few things in order before applying for a mortgage.
- Keep your records and accounts up to date.
- Enlist a certified or chartered accountant who will prepare your accounts and tax return.
- Speak to a mortgage broker about your options.
- Don’t assume you won’t be able to get a good mortgage deal.
- Don’t minimise your income for tax purposes. It may sound inviting but it can affect your chances of a mortgage.
If you’re in the North East, then speak to The Mortgage Dog! We have lots of experience in dealing with the self-employed and can advise you. Contact us today.
Your home may be repossessed if you do not keep up repayments on your mortgage.
