At Advice Plain & Simple, our local mortgage advisors understand that questions often crop up if individuals are considering getting a mortgage when self-employed. In this article, we aim to cover some of the common queries but if yours remains unanswered, please don’t hesitate to get in touch with our Worcester mortgage advisors.
I wouldn't say it's harder to get a mortgage if you’re self-employed, but it’s less straightforward than for an employed person. You'll find that lenders will ask you for more documentation. They're potentially going to look at your income a little bit more closely, compared with an employed person who will just have to provide payslips and maybe some bank statements.
Lenders vary in terms of how much they will lend self-employed people and the type of self-employed clients they will accept. That just means you need to do a bit more research before you apply to a lender.
Getting a self-employed mortgage should still be possible with just one year’s accounts. The majority of lenders usually want two years’ history as self-employed, but some will accept a year's self-employed income.
For example, if someone who had one year's accounts as an accountant decided to be a self-employed builder, they might struggle because there's no work experience history. However, an employed accountant moving to become a self-employed accountant is more likely to be accepted with a year’s accounts.
There are even lenders who in some scenarios would accept the self-employed from day one. Imagine a doctor who has worked for the NHS for five years is buying into a local, established practice. Many lenders would consider that from day one because the practice already has history. So, it is possible to get a mortgage with one year’s accounts, and sometimes less.
Thankfully not, but we have seen some companies try to set up self-certs abroad. I would avoid those companies like the plague.
Self-cert mortgages are not a good idea - back in 2008 a major factor in the credit crunch for the mortgage world was self-cert, and so they're not available anymore.
It does help to have someone else on the mortgage who's employed, particularly when it comes to credit scoring. It will also increase the amount you can borrow because the lender will base the loan on your combined incomes.
One thing to do before you apply for a mortgage is to have a look at your credit score and register on the electoral roll. Some lenders might score you more harshly when you’re self-employed as the risk to them is higher.
A lot of this has to do with how the lenders treat you - firstly in terms of how they calculate your income. If you’re a sole trader or running a partnership, the lender will usually take two years worth of your tax returns. They've got various names: tax calculations or SA302s. The lender will usually work off your net profit, which is your income after your expenses. They will usually take either an average of your last two years’ net profits or use your latest year if there's a steady increase.
The main difference for a limited company is that even though you're self-employed, you're actually employed by your limited company and receive your income via salary and dividends. The majority of lenders will use your two years’ salary and dividend figures from your tax calculations.
But some lenders will disregard your dividends and go for your salary and net profits instead - that will often allow you to borrow a lot more. So, as a limited company, the way lenders can view you will vary considerably.
Where affordability can vary is whether the lender uses the average of your last two years or your latest year. The average income might work out at, say, £25,000 but if your latest year is £40,000 that could be quite a big difference.
But it’s with limited companies that we see the biggest difference in affordability. A limited company director may have taken a salary and dividend of say £40,000 - some lenders will take that as the income. But perhaps their net profit is £100,000 a year. Other lenders will take that as your income - which means a massive difference in how much you can borrow.
If you want a rough idea of how much you could borrow, the very general rule is about 4.5 times your income, up to a maximum of about 4.75 and, in some very rare instances, up to 5 times.
There are the usual documents which are the same for an employed person - your ID, proof of address and bank statements. The additional documents you need as a self-employed person will potentially be your company accounts if you're limited, usually for the last two years. I usually suggest having business bank statements ready too.
In most cases, the lender will ask for your tax calculations or SA302 forms which essentially confirm the net profit stated on your last tax return if you’re self-employed or salary and dividends if you're a limited company.
Generally, banks are looking for companies that have constant income, rather than businesses with big gaps between business turnover.
If you've got an accountant, your mortgage broker can liaise with them directly. The accountant will be able to download the documentation we need and send it over.
There's no real difference at all whether you're employed or self-employed for a Buy to Let mortgage. Again, lenders need to confirm your income, but your personal income is not too important in many cases. You'll probably find that you'll be in a very similar position as if you were employed.
If you were going to another lender, it is largely the same as if you’re employed. Again, it’s just remembering you're going to have to provide more documentation to prove your income.
Because of that additional paperwork, you might decide to go for a more simple rate switch or product switch where there's no underwriting. Essentially, you stay with your existing lender and just select a new product. It’s faster and simpler - you're not changing anything about your mortgage. You’re just avoiding being put on a higher interest rate.
But if you did want to borrow more or change something significant, a remortgage is the same process as for the employed. It's just about that extra documentation.
If you are looking for the best mortgages for self-employed set-ups, Advice Plain & Simple has a specialist team that can help. Our experienced brokers understand the intricacies of self-employment and are well-versed in navigating the complexities of securing mortgages for those with diverse income streams. Whether you're a freelancer, contractor, or run your own business, our experts will guide you through the process, offering personalised advice.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH REPAYMENTS ON YOUR MORTGAGE.
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