Almost 75 % of self-employed borrowers fear it will be harder to get a mortgage due to their employment status, according to new information.
Online mortgage broker Trussle discovered that 1,421 out of 2,000 self-employed borrowers believe working independently could harm their likelihood of obtaining a mortgage.
However, the reality is very different.Here, Which? Mortgage Advisers’ David Blake, an expert in assisting self-employed buyers get mortgages, helps you to address a few of the many myths that abound in this region.
1. You’ll struggle to obtain a self-employed mortgage
For starters there is no such thing like a ‘self-employed mortgage’ – you’ll be applying for the same mortgage products as homebuyers who're employed.
But whatever you call it, there is certainly a belief that it’s more difficult for individuals who work for themselves.
This is most likely because, around about ten years ago, self-employed mortgage applicants would use ‘self-certification’, which meant they could borrow while not having to prove their income – which was outlawed through the Financial Conduct Authority in 2011.
The end of self-certification managed to get much tougher for self-employed individuals to get mortgages, however the growing self-employed workforce – currently 4.85 million, set to rise to five.5 million by 2022 based on Trussle – means lenders are experiencing to become a lot more available to self-employed buyers.
This implies that the mortgage choices for self-employed people have grown considerably recently.
David Blake says: ‘Over the past 12 months lenders have looked to be more innovative and versatile in the way they deal with people who are earning on a self-employed basis.
‘Being self-employed is really a growing trend, so lenders are starting to know it better and see it as being less of a risk.’
2. Self-employed mortgage applicants need to show at least 2 yrs of accounts
It’s true that most lenders will need at least 2 yrs of accounts from self-employed applicants, however, many need just one year’s worth.
We analysed data from Moneyfacts to check on which lenders would consider self-employed applicants and their main criteria for lending (begin to see the table below).
We found at least 76 lenders – including major players for example Barclays, HSBC, Santander and TSB – that will consider a self-employed applicant.
Of these, 13 would accept self-employed workers with just Twelve months of accounts. (Lenders not in the table didn’t have a particular policy around self-employed people.)
In fact, based on David, it's not even necessarily no more the road if you don't have a finalised single year of accounts.
‘Some lenders work on a case-by-case basis and can consider applicants who present a low risk,’ he says.
‘This may be someone with bags of expertise within their industry who’s decided to go self-employed since it is more profitable.
‘Should they have a substantial deposit and may show draft gures from a cpa, it is possible this type of applicant could be acceptable to some lenders.’
3. You’ll need a deposit with a minimum of 10% as a self-employed buyer
Most lenders are willing to offer 95% mortgages to buyers with a 5% deposit, whether or not you’re self-employed or work with a company.
As with any house purchase, however, if you have a bigger deposit be more successful to secure a mortgage in a rate plan.
4. You won’t get as good a deal as a company employee would
David Blake told us that so long as you (as a self-employed person) can provide proof of your earnings to satisfy your lender, there’s pointless the reason why you shouldn’t qualify for the same deals as employed applicants.
5. Self-employed buyers can’t borrow just as much money
Most lenders will offer exactly the same amount to self-employed workers as employed ones, according to David Blake.
This is commonly between three and five times your annual income.
However, if you’re a sole trader and also you have a tendency to keep your net profit lower in order to pay less tax, this may be a sticking point. To be able to borrow more from the mortgage lender your net gain needs to be as ‘high as possible’, based on David.
6. You could find the best mortgages on comparison sites
Comparison sites don’t always list every available deal, meaning there may sometimes be better mortgage products out there than what you see on the comparison site.
For this reason, it’s really worth utilizing a whole-of-market broker who can assess each and every mortgage for sale to help you find the very best one.
David said: ‘When choosing a home loan broker, ask whether they are independent or tied to a particular panel of lenders.
‘Also, inquire if they will tell you about mortgages that you can only manage applying directly (with no broker’s help), and how their fees and commission work.’
7. Lenders won’t have a limited company’s profits into account
If you’ve chosen to create yourself as a limited company in order to keep your company and private finances separate, lenders will normally ask to see either your share of net profits after corporation tax has been deducted as well as your salary, or perhaps your salary and dividends.
David told us that limited company applicants who've a low profit for a specific reason (for example purchasing products) but an acceptable degree of salary and dividends shouldn't be treated differently. Nor should someone with a significant profit but a low salary and dividends.
It’s common for limited company applicants to possess a significant profit but low salary for tax purposes.
8. Lenders will appear at your business partner’s personal finances
If you’re inside a partnership, Which? Mortgage Advisers’ David Blake asserted lenders will generally look to see the ‘strength of the business’, including its future profits and just what your share of those could be.
However, he explained this should not be a hindrance and that self-employed applicants for example doctors, barristers and dentists who’ve just started a partnership should have no issues.
He said lenders would not review your business partner’s personal finances.
David added: ‘Lenders will want to look at the business in general. They want to see how the business has been doing so they can make a judgement call, a risk analysis, around the sustainability from the applicant’s income continuing to move forward.’
9. Lenders won’t take a contractor’s day rate into consideration
Increasing amounts of lenders are considering applicants who receive money each day rate instead of an annual salary. This is because more and more people are freelancing and earning in this manner, particularly in professions such as IT.
When we spoke to David Blake, he designated providers such as Halifax and Nationwide, which he said have very flexible criteria when it comes to contract workers.
People who have significant experience of their industry and also have started freelance work paid in a daily rate may be accepted by lenders than the usual self-employed person just starting their career, based on David.
The self-employed mortgage beliefs that are actually true
As you’ve seen from the myths we’ve busted, typically self-employed mortgage applicants are treated similarly to people who're utilized by companies. However, there are a few things you need to be mindful of.
You’ll have to submit several tax forms
SA302 forms provide annual tax calculations, and most (while not all – see myth 2) lenders will ask for three (one for every from the last three years) whenever you obtain a mortgage.
It’s worth noting that they'll want to see paperwork for the most recent tax year, to have to submit your form prior to the state deadline.
If you’ve sent your self-assessment tax returns online, you are able to print off your SA302 calculations. Should you filed your accounts by post, you’ll have to contact HMRC and allow up to fourteen days for your forms to reach.
You should have your finances in order
You will try to have your money within the best possible condition. Make sure you repay any debts, ensure there are no incorrect details on your credit files and obtain around the electoral roll.
Also consider your spending habits, as regular outgoings will be taken into consideration by your lender.
Bear in your mind that lenders will look at the business bank statements, along with your personal ones.
You may need an accountant
If you’ve generate a limited company, you'll almost definitely need a certified or chartered accountant to organize your accounts.
In fact, some lenders won’t even consider applications from self-employed people who are operating as limited companies but don’t have up-to-date accounts signed off by an accountant.
You don’t have to do this if you’re a sole trader, however.
Seek expert mortgage advice
A whole-of-market broker will have detailed understanding of the lenders who are most sympathetic to self-employed mortgage applicants. They should be able to counsel you around the lender most likely to say yes, in addition to who'll provide the cheapest price for the circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.
