Self Employed Mortgages
Paul Holland answers your questions on self-employed mortgages.
Is it harder to get a mortgage if you are self-employed?
A little. It’s a very layered question, as most are with regards to mortgages. You could get someone who was employed that has a hard time finding a mortgage, but if you looked at 50 clients or so, I think you would find that in general the self-employed will have had the harder cases.
Can I still get a mortgage if I only have one year’s accounts?
There are some lenders that offer mortgages to people that have been trading for just one year. That’s not the main reason why people can’t get mortgages at that stage. It’s more that the first year of trading for businesses tends to result in a smaller income – so it’s more of an affordability issue.
It could also be a combination of factors. Looking for lenders with one year’s accounts will limit the amount of providers you can approach. So if you then throw in any other criteria issues, such as poor credit, it quickly whittles your options away. That might mean your mortgage deal isn’t as favourable as for someone with two or three years’ worth of accounts.
That said, it’s certainly worth having a chat to see if a good mortgage deal is an option for you. If it isn’t, then we can put a plan of action together to get you in a stronger position next time around.
Are self-cert mortgages still available?
No, and there’s no point of going into any detail there. They don’t exist and haven’t done for a long time, for good reason. Yet people do still ask the question.
Can you get a joint mortgage if one person is self-employed?
Yes, and it’s no different for one person getting a single mortgage or a self-employed person or two people who are employed. It’s a very similar process. It’s just one of them will be evidencing their income slightly differently.
Are Buy to Let mortgages available for the self-employed?
Yes, and again it’s very similar for the employed or self-employed in terms of the deals available and the process. The main difference is ultimately how you’re going to evidence your income. It can be slightly more work or more difficult, but generally the process is very similar.
What’s the difference for someone who is self-employed and a Limited Company Director?
The main misconception here in a mortgage sense is that limited company directors are employed by their business on some element of PAYE. So it’s not uncommon for people to assume that lenders will see them as employed and ask for the latest three months payslips.
But that isn’t the case. If you have a shareholding of 20% to 25% of that business or more, lenders will see you as self-employed because realistically you are that business.
So rather than just looking at the last three months’ pay, they’ll look at a bigger history of income for the company and you personally. Realistically, a Limited Company Director with 20% ownership or more is in the same boat as a Sole Trader.
How does remortgaging work for the self-employed?
Remortgaging when you’re self-employed works the same as buying a property. Again, you will evidence their income in a slightly different manner.
What we do find is if someone was employed when they bought a property and then are self-employed when they come to remortgage, things can be really different for them. Evidencing income can be difficult depending on the timings. So, if going self-employed is an intention of yours, it’s worth having a chat with your broker now about how that might pan out in the future.
How much can a self-employed person borrow?
The crux of the question is income. There’s no difference when you look at it from that perspective. If you were on a £50,000 basic employed salary, or if your self-employed income is £50,000, there’s minimal difference in how much you can borrow.
There might be a very slight difference on the multiple that they apply. For argument’s sake, if you’re employed a lender might apply a 4.75 times multiple to your income, while if you were self-employed they might multiply by 4.5… so there may be slight differences to the background calculations.
Generally speaking, though, the difference is more about how the lender arrives at that income figure. A payslip shows a basic salary, while a self-employed person will submit their earnings to HMRC once a year. Some lenders will use an average of the last two years’ tax records; some will take an average of the last three years.
The key thing is to talk to a broker who can look at all the numbers for you and explore ways to maximise your borrowing and keep mortgage costs down.
What documents do I need when applying for a self-employed mortgage?
You will need to provide personal bank statements and ID no matter how your employment is set up.
An employed person will be asked for payslips and a P60, whereas a self-employed person or sole trader would be asked for an SA302 with a corresponding tax year overview. An SA302 realistically an annual pay slip from HMRC – it states what you earned that year.
The corresponding document is a tax year overview document – it’s ultimately a receipt from HMRC to say you’ve paid your tax bill. As we’ve said you might need at least two year’s records and in some cases three years’.
If you’re a limited company director, the lender will also want to see sets of company accounts. They want to see turnover, gross profit, net profit and other details within those accounts as well as your personal income documents – the SA302 and tax overview documents. They might also ask for the business bank statements as well as personal bank statements.
What advice do you have for someone looking for a self-employed mortgage?
As always, it’s all about the preparation. That’s even more key in a self-employed world. With regards to that long list of documentation, we tend to liaise with accountants if they’re accessible because they’ve got easier access to the documents than the client.
It’s worth pre-empting self-employed income, because you’re submitting all of your income to HMRC and it’s locked in for 12 months. There may be things you can preempt at that point to help you in your upcoming mortgage applications and show your income in the most positive light. We’ll be able to highlight those things with you. We work together with you and your accountant to make sure your life is as easy as it can be when it comes to getting a mortgage deal.
Your property may be repossessed if you do not keep up with your mortgage repayments.