Getting a mortgage or remortgaging a property can be challenging at the best of times, with many lenders lowering the limits on how much they will lend to applicants or requiring higher deposits, particularly on flats and new builds. Add in the added complication of being self-employed and not necessarily having a fixed income, and it may seem like a life of renting is the only option.
With some planning and being organised with your finances, however, the dream of homeownership can become a reality.
Firstly, let’s be clear that there’s no such thing as a self-employed mortgage. You’ll have access to the same mortgage products as everyone else in the UK, whatever your employment status.
Pre-2014 there was such a thing as a self-certification mortgage aimed at people, such as the self-employed, who were unable to provide proof of their regular income. Applicants were able to declare their income when applying for a self-certification mortgage without providing evidence to support it. Lenders would charge a higher interest rate because of this added risk. Given the obvious potential issues with this method, including fraud and a high level of arrears, the Financial Services Authority called for them to be banned, and lenders stopped offering them.
This has led to calls for a mortgage offering that caters to the self-employed, but currently, nothing specific is available. This means it’s down to the applicant to fulfil a lender’s requirements and prove they can repay the mortgage.
As a self-employed person, it’s important that you maintain accurate and clear financial records at all times, and this will also benefit you when it comes to applying for a mortgage. For starters, you’ll need certified accounts for two or more years, as well as evidence of your earnings from HMRC – you can get this by filling in form SA302. You will also likely be asked for proof of upcoming work, such as agreed contracts and proof of dividend payments or retained profit if you’re a company director.
In addition to this, you’ll have to supply the information that employed people also have to present, so have your passport, driving licence, council tax bills, three months of utility bills and six months of bank statements to hand.
Lenders will also want to confirm that you live within your means, so you’ll be asked about your spending habits and any regular outgoings.
If you don’t have any accounts or have only been self-employed for one financial year, it can be a lot harder to prove to a lender that you have the future business lined up to cover your repayments. You can give yourself the best shot by collating all the information you have on upcoming work and aiming to show that you have steady clients you’re working with regularly. Also, try different lenders as they may have different requirements.
As a sole trader, you and your business are the same legal entity, so all profit belongs to you. This, combined with your SA302, which will state total income and total tax paid, makes it relatively easy for a lender to assess your financial situation. By looking at your accounts, they’ll also be able to see if your income is consistent. If it has increased in the past few years, they may opt to work off an average, while if it’s decreased, lenders may act cautiously and base what you can borrow on the lowest figures.
For limited company directors, lenders will look at your basic salary and dividend payments for. Some may also take retained profit into account.
So long as your accounts are clear and accurate and you supply the information that’s needed, the legal status of your business shouldn’t impact your ability to get a mortgage. You can typically expect to be offered a mortgage of 3 to 4.5 times your annual income.
As with so many things, speaking to experts can be a great way to put yourself in the strongest possible position for a positive outcome. In this case, this can include using a qualified accountant to prepare your finances and employing a mortgage broker. Lenders often prefer that you employ an accountant and may even state that they need to be chartered or certified; it also means you can be confident you have all the information you need presented, something which again will stand you in good stead with the lender.
A mortgage broker will also be of value – they’ll likely know which lenders are more willing to lend to the self-employed, who offers the best rates and if there are any more flexible on the requirement of the two-year account, knowledge that could save you time and money.
Again, whether self-employed or not, the bigger your deposit, the better your chances of securing the mortgage you want, so focus on saving as much as possible.
Lenders will run a credit check on you and your business, so if there are any outstanding debts or bills you can settle, do so before this happens. If you’re uncertain about your own credit score, consider checking it yourself ahead of time, either through your bank or a credit reference agency.
Some lenders also check that you’re registered to vote, so take a few minutes to ensure you’re on the electoral register.
In a normal year, your accountant will likely use legitimate methods to reduce your taxable income. When you’re trying to secure a mortgage, however, this could work against you as the higher your income, the more you’ll be able to borrow. As you’ll likely be saving for a deposit and planning your purchase for some time, it can be a good idea to speak to your accountant and ask them not to make any reductions for a period of time.
Of course, securing a mortgage to buy a house isn’t the end of this journey. Many mortgage rates will only last for a fixed amount of time, so inevitably, you’ll have to remortgage at some point in the future. To do this, you’ll have to provide the same information as you did for the initial application, so it’s important to keep your finances in good shape.
While remortgaging is a great time to see if you can get a better rate, always speak to your current lender – or get your mortgage broker to – as they know your situation and know you have met your repayments may be able to offer you a better deal.
As time passes, you’ll also build up more equity in your home, giving you a better loan to value ratio. As this improves, your chance of remortgage success will increase as lenders see this equity as collateral, and lending becomes less risky.
Securing a mortgage when self-employed can be a challenge, but it’s certainly not impossible. The basis of success is having accessible, accurate accounts you can be confident in, so having the right accounting software is essential. To find out how AccountsPortal can support your business, contact us today.