Self Employed Mortgages
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Self Employed Mortgages
Paul Holland sits down and explains everything 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.
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Paul Holland continues the conversation on self-employed mortgages.
What is the difference between interest only and repayment self-employed mortgages?
Whether you’re self-employed or employed makes little difference, but I’ll explain how these two products work.
A repayment mortgage will be repaid over the term of the mortgage. Let’s say you have a 25 year mortgage – after 25 years the balance will be zero. But an interest only mortgage is not repaid over the term. The balance would effectively remain the same, as you’re only paying the interest payments each month and not the capital. A lender will then ask you for that interest only mortgage to be repaid at the end of the term.
It’s unusual for people to use an interest only mortgage for their main residence. If you did, it could ultimately leave you in a position where you’d have to sell your home when you retire, because you’ve got to pay your lender back. That’s not ideal.
They’re more likely to be used for Buy to Let properties, to get an income from that property as rent over the term. At the end of the term you then can sell that property and cash in on the capital appreciation – and stay in your own home while you do that.
There are options to have an interest only mortgage on your main residence, but you will have to meet certain criteria. That’s generally a combination of having a certain amount of equity in your property and a level of income for the mortgage application.
What are the minimum mortgage requirements for self-employed people?
An underwriter is always going to ask a self-employed person for a specific set of documents that differ from that of someone on Pay as you Earn.
If you currently own over 20% or 25% of the shares in your business, a lender will see you as self-employed, whether you’re a sole trader or company director. Some people think they’re going to be viewed as employed because they’re paid a salary from their business on a pay slip. But it’s not the case I’m afraid, even though that would make our lives a lot easier.
You’ll need the last two years of SA302s, known as tax calculations. If you’ve only been trading for a year you can just provide one. You will also need corresponding tax year overview documents as well.
These documents might be very obvious to people, but if you haven’t heard of them you can get them from your HMRC portal. If you use an accountant, just ask them. On top of that you’re going to need personal bank statements showing your income.
If you’re a sole trader you’ll generally just have one bank account and your income or profits will go into that. You’ll need three months of statements showing those income credits. You also need the typical photo ID and proof of address. You’ll probably need proof of a deposit as well, which is normally a minimum of 5% upwards.
If you’re a limited company director, you will also need two years’ worth of company accounts. Again you can supply one year’s records if you’ve not been trading that long. Similarly you need bank statements for the business.
That’s the standard list of self-employed evidence. There can be more if you’re a contractor or on the Construction Industry Scheme, but if you have all this information ready you won’t be far off having everything you need.
What if someone’s income has dropped significantly in the past year?
Self-employed customers are a big proportion of the clients that we deal with here. Since Covid, there could be lots of reasons why your income could be less than it was one, two or even five years ago when you took out your mortgage.
It may not even be that your income is actually less, but that seems the case to a mortgage numberwriter. Perhaps you’ve switched from employed to self-employed or from sole trader to a limited company.
Those sorts of changes could put you in a position where you can’t meet the full list of lender requirements. You might in reality be earning more than you were, but the documentation isn’t there to back it up. Or you might simply be earning less money than you did before.
If an underwriter determines a downward trend from your previous year to your latest year, they will almost always use the lower figure for affordability purposes. We will run the figures based on what you have to hand – and also run different scenarios. Let’s say your income is on the way back up but you haven’t yet declared it. Based on a projection, some people might choose to push the application back and wait for things to be back on track.
If you’re looking to borrow more, it could be more difficult. Otherwise, it’s not usually an issue. I have a good example where a client’s business was impacted quite hard by Covid.
Example: a self-employed client with reduced income
The client’s latest accounts were a fair bit lower than when we had arranged their mortgage a couple of years ago. Their fixed deal was coming to an end. We normally speak to people around six months before that.
The lender was saying that the new monthly payment when the mortgage ended would be £950 per month more than they were used to paying. Because their income had dropped so much as a result of Covid they just assumed that they had no choice but to fall into that. They didn’t think they could secure a better deal with their reduced affordability, which was a big worry to them.
But we simply approached their existing lender and secured them a new fixed rate. It would start when their current deal ended. The payments still increased, but by £500 instead of that £950.
Everybody’s rates are going up at the moment and mitigating that increase is obviously at the top of people’s priority list. So if you’ve got a mortgage and your income has dropped, you can still get a new fixed rate with your lender.
Don’t let yourself fall into the standard variable rate because you think you can’t get a new mortgage based on your income. Have a chat with us and we’ll see how we can help.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.
Self-Employed Mortgages (Part 3)
Paul Holland answers more questions on self-employed mortgages.
How do multiple incomes affect a self-employed mortgage application?
Having multiple income sources as a self-employed individual can actually be an advantage when applying for a mortgage.
But it’s imperative that you’re well prepared and transparent about your income. If your income isn’t well documented, it could become tricky. The goal is to evidence that you’re able to meet your mortgage payments comfortably, to show the lender how well-monitored your income situation is, and whether it’s sustainable.
You’ll need a good credit status and all documentation needs to be in order. You will evidence your multiple income streams by way of an SA302 and your company accounts, so make sure they’re all up to date. You can obtain them from your accountant or log into your HMRC portal and download documents for any given tax period.
Multiple income streams could also include any employed salary payments. People could be self-employed as well as employed, or, as a managing director you may pay yourself a small salary.
It’s going to include profit from self-employment, dividends, profit from land or property or any other investments in the background – even a pension income if you’re being paid that.
If those streams of incomes have been consistent and look sustainable going forward, they can all be factored into your mortgage application from an affordability point of view.
How do mortgage lenders view seasonal income for self-employed applicants?
Seasonal income can present a challenge from a mortgage application, but it’s not insurmountable. It’s helpful to provide thorough income evidence and documentation that demonstrates your ability to manage your finances effectively during those low-income periods.
If the mortgage is ultimately going to be something you can service, your documentation should allude to that. If it isn’t, then that should also be shown in the documentation. The key, really, is to be prepared.
Your documentation will only evidence whether or not you’re capable of keeping up the mortgage payments. If you’ve been doing this consistently over a number of years, that’s going to be visible to an underwriter. Prepare now, so that when it comes to your mortgage application, you’ve got all your finances in order.
Another key point here is to save. If it’s a purchase application and your deposit isn’t tied up in a property – so it’s not a remortgage and you’re not selling a home – the larger the pot of savings you have, the better.
Again, that’s going to demonstrate your ability to manage your income and save at the same time. You’re showing the underwriter that this seasonal income situation isn’t causing you any issues. Also, the larger the deposit, the smaller the borrowing. That’s always going to go in your favour if you have peaks and troughs to your income.
The biggest tip when it comes to securing a mortgage with seasonal income for self-employed people is to get professional advice. You might think that’s very coincidental, because that’s obviously what we offer.
But there are so many lenders out there: some who see self-employed people and self-employed income as risky, and some that just don’t like to look at it. Meanwhile, other lenders have a much more lenient approach to self-employed people and seasonal income.
It’s not quite as simple as walking into a bank and asking for a mortgage. You’re unlikely to be able to pick the most competitive mortgage available. But a good broker would give up their time to speak with various different lenders from a calculated shortlist – providers that we know would potentially fit the bill better than others.
We approach those people, have a conversation about your specific scenario, and come back with a recommendation. We’ll identify the lenders to place your mortgage business with at the end of that research period.
Is it important to be organised?
Yes. With self-employment, whatever you do, it’s only recorded once a year. So if you’re making changes now, you could be 11 months away from submitting those changes to HMRC. Because you only declare your income once a year, the lender won’t be able to see any difference.
So any changes need to be implemented at the earliest stage possible. Sometimes, if you haven’t done things correctly, it can take a couple of years for you to cover your tracks. Preparation is key, really.
What tax returns are required for a self-employed mortgage application?
If you’re a sole trader, or anyone that’s self-employed, you’ll generally submit your income scenario to HMRC once a year. Your personal income will derive from your profits from self-employment, salaries and dividends. You’ll submit that to HMRC.
April to April is the financial year. Whatever income you’ve earned through that period of time, you’ll submit it to HMRC and then you’ll get a bill for your tax off the back of that declaration.
HMRC produces something very similar to a payslip on a monthly basis for a PAYE person. It’s a document called an SA302, also known as a tax calculation or a tax computation. This document goes hand in hand with the corresponding tax year overview – almost like a bill from HMRC for your tax. You also get a receipt for the payment of the tax.
Everybody with any self-employment income will have to give a lender those documents for a mortgage application. If, on top of that, you’re a limited company, you’ll also need to provide tax returns for that business or company accounts as well.
These don’t necessarily run from April to April. It all depends on when you incorporated your limited company. Our company started in November, for example, so we’ve got a November to November company reporting tax period. My personal income that I draw down from the business will be declared or visible through an SA302.
If you’ve only been trading for one year, then you can apply for a mortgage but only to certain lenders. Because you only have one set of accounts, of course, that’s all they’re going to ask you for – plus, potentially, a projection from your accountant.
If you’ve been trading for two years, most lenders will ask for the latest two years’ records. Some will go a little bit further and require three years’ worth of trading figures from a mortgage applicant. The amount of history you have as a mortgage applicant will really determine how many lenders you have at your disposal and which is your best option to go to.
Rather than guessing or going to your bank and hoping that they’re the best suited option for your situation, every one of the brokers in our team will know exactly who needs one, two or three years worth of accounts and how they’ll be viewed depending on the applicant’s individual circumstances.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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Self-Employed Mortgages (Part 4)
Paul Holland returns for part four of our series on self-employed mortgages.
What percentage of a property price can a self-employed person borrow?
A self-employed person can borrow up to 95% on a conventional property purchase. They’d need a cash deposit of 5% to bridge the gap. If their property costs £300,000, for argument’s sake, they would need a deposit of £15,000 and a mortgage of £285,000.
There are lots of other factors that could result in that percentage being decreased, but being self-employed in isolation isn’t one of them.
Credit history can be a factor, however. Sometimes, lenders will restrict the loan to value based on your credit status. Regardless of whether or not you’ve only got a 5% deposit, they might require 10% or 15%. That’s quite a common thing for people with less than perfect credit ratings.
Another thing that can have an effect is mortgage rates not being as competitive as they previously were. So if you want to borrow £285,000, because rates are higher you might not be able to afford the repayments. You’d need to increase your deposit or even decrease your target property price.
The last key thing is affordability, which you can again improve by increasing your deposit or decreasing the price of properties you’re looking at.
What other less conventional options are there?
There are certain schemes out there that may be worth exploring, especially if the deposit is the restricting factor. If you do only have 5% of the purchase price, then there are a few schemes we can consider.
One in particular is called a Family Springboard, where you can borrow up to 100% of the purchase price. But a family member would need to put 10% of their own savings into a savings account, which they don’t get back for five years. When it is returned, it comes with added interest from the savings account.
It doesn’t have to be mum, dad or or direct family member – it can be a friend or another relative. If they’ve got a lump sum that they’re effectively happy to use, but not give to you, this could be a product that fits the bill.
How does someone prove their income if they are self-employed and working on contracts?
Firstly, for anybody working on a contract basis, it’s a case of preparation. You need to be keeping detailed, organised financial accounts and contract information at all times. Make sure you’ve got easy access to your contracts.
Having past, current, and future contract details is going to make the mortgage process a lot smoother for you. A lender is always going to want some degree of contracting history, whether it’s six months for one lender, or 12 months for another.
It’s all about income sustainability. Will a new contract kick in when your current one ends, or is there some written proof from your client that it will continue beyond the current end date?
Accounts-wise, generally contractors are self-employed, whether that be through a limited company or as a sole trader or even under an umbrella company. So have any HMRC documents to hand as well. Things like SA302s, tax year overview documents, and company accounts, if you have gone under the limited company bracket.
If you work through an umbrella company, make sure you have your payslips on file too. So with any documentation produced as a result of being a contractor, store it nice and safely for an upcoming mortgage.
Can someone with no proof of income get a self-employed mortgage?
There are two different ways of answering this question.
If it’s being asked about someone who hasn’t submitted a set of accounts yet because they haven’t been self-employed for long enough, they won’t be able to get a mortgage as a sole applicant with no other income. I get the feeling that’s why someone might Google that question.
At the very least, you’re going to need one set of accounts to have been submitted to HMRC as a self-employed person or a business before a lender will offer you a mortgage.
But, if the question was whether we can successfully arrange a mortgage where a self-employed applicant on the application had no income proof, then yes.
Here’s an example of how we would have done that. Say Mr. Smith has been self-employed for 10 months and hasn’t submitted a set of accounts. But Mrs. Smith has an employed income, and it’s enough to service the mortgage they’re looking for.
If there’s someone else on the application with an income, you can still go on that application – even at an early stage in your self-employment. The self-employed person also could have evidence for other income that’s outside their self-employment. That might be pensions, investments, or income from Buy to Let properties.
In some cases, self-employed applicants have some employment, whether it’s part-time or even full-time. That happens quite regularly.
Can I get a Buy to Let mortgage with less than a year’s self-employed income?
Yes, you could still get a Buy to Let mortgage, because some lenders don’t set any minimum income requirements. The loan is assessed purely on the rental income that is derived from the property. You could get a mortgage, but on a Buy to Let property rather than a residential one.
The common denominator is income. For a residential mortgage there has to be one form of income, whether it’s from someone else or something else.
If you fall into that small bracket of people who are self-employed but haven’t yet operated for 12 months, you’re going to struggle to secure a mortgage without there being some other form of income on the application.
What else do we need to know about self-employed mortgages for people that have just started a business?
If you’re self-employed and that’s the only source of income you’ve got for the application, then you just have to wait until you’ve got that first set of accounts submitted to HMRC.
If you’re a sole trader, that’s April to April. Come April, as soon as you’ve submitted that personal set of accounts, we’ve got income to put towards your affordability.
If you’ve set up a limited company, you could use your net profit as income, but it will depend on when the company was incorporated. If you incorporated in December last year, then from next month you could submit your first set of accounts and provide evidence for a mortgage application [podcast recorded in November 2023].
Your home may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most buy to let mortgages.
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Self-Employed Mortgages (Part 5)
Self-employed mortgages continued with Paul Holland.
Can someone with a small deposit apply for a self-employed mortgage?
Yes. If you’re self-employed and you have a 5% deposit, there are conventional mainstream mortgage lenders that will lend you the other 95%.
As I always say, the bigger the deposit, the better. But if you’re working with 5%, it is possible to secure the other 95%. There are other things to bear in mind, however.
Your income needs to achieve the required affordability to bridge that 95% gap. You need to have been trading for long enough to provide the necessary proofs for a conventional mortgage application.
If we’re looking at a conventional mortgage application, then the bare minimum an underwriter will require is one set of accounts, which means you need to have been trading for 12 months. Your trading time will also be a factor in whether or not you can get a mortgage with 5% deposit as a self-employed person.
Another thing worth noting is that the smaller the deposit, the harsher the credit scoring in the application. A 95% mortgage is the hardest mortgage to get from a credit status point of view. If you’ve got a small deposit, you really need a squeaky clean credit history.
Can someone use their partner’s income to support a self-employed mortgage application?
Absolutely. Here’s an example. if you’ve recently gone self-employed and you are yet to submit any accounts to HMRC, you effectively have no income evidence for a mortgage application. Obviously you do have income, but you haven’t declared it as such to HMRC by this point.
But you can still apply for a mortgage as long as there’s someone else on the application with sufficient income to meet the affordability. We will assess all the income and expenditure from all the applicants on the application, whether you’re all creditworthy, and confirm the maximum loan for your scenario.
Although each applicant will be looked at individually, the underwriter is assessing the application as a whole. So if you haven’t yet got self-employed income evidence, it doesn’t mean that you can’t get a mortgage.
How does a self-employed mortgage application differ if someone has multiple sources of income?
On an application for a self-employed person who has multiple sources of income, it’s all down to how we package the information.
Any income you want to use towards a mortgage will need to be documented for the underwriter. If you’re employed and that’s your only source of income, that evidence is simply your latest three payslips. That’s going to tell the underwriter all they need to know about your earnings.
However, if you’re self-employed, it’s a bit different. You submit your accounts to HMRC once a year. That’s going to produce an SA302 – a tax year overview – and maybe a set of company accounts. If you’ve been trading for two years or more, you’re going to need the latest two years’ evidence.
So it’s already more long-winded than just providing your latest three payslips. Now, if you’re part-time employed, you run a self-employed business on the side, you have a couple of rental properties generating income for you, and you’ve got a pension pot paying out, that’s a lot of evidence to provide to the underwriter.
Multiple streams of income is great, because potentially you’ve got lots of income. But for a mortgage application, you need to get your ducks in a row sooner, and it might be a little bit more difficult to provide everything that the underwriter asks for.
It might also take you a little bit longer to get the application over the line. But if you’re in touch with the right people: your broker, your solicitor and your accountant, it should run smoothly enough.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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Self-Employed Mortgages (Part 6)
Paul Holland continues answering your questions on self-employed mortgages.
What are the typical deposit requirements for self-employed mortgages?
With a conventional mortgage, the typical deposit requirement for self-employed applicants starts from as little as 5%. You need to bridge the remaining 95% gap with a mortgage, which is predominantly based on your affordability.
If you can’t do that, one of two things need to happen. Your deposit will need to be larger or the property price will need to be smaller. As we always say, the larger the deposit, the better.
Things just tend to become a lot easier every time you reach a higher bracket. So at 10% it’s a little bit easier, if you have 15% deposit, it’s easier again. You get the gist.
But in conclusion, it is possible for self-employed people to purchase via a conventional mortgage with as little as 5%, but the deposit really just scratches the surface when it comes to complexities around self-employed people mortgages.
What if someone has a short trading history but a good income?
A short trading history is generally the biggest problem that we experience from self-employed applicants when it comes to getting a mortgage. But if it’s coupled with a good income, that can make things much easier.
If you’ve been trading for a year and you’ve submitted a set of accounts to HMRC, at that point, generally, you can secure a mortgage. The size of that mortgage, though, is really going to depend on the success of your first year – along with any additional income on the application. That might be income from land and property, or your partner on the mortgage application with you.
The challenge is that companies in their infancy might not profit as much as they’re going to when they’re fully established. But that isn’t always the case. You could have switched from an employed role to a sole trader or a limited company in the exact same job, maintained all your clients, and earn as much in the first year as you have historically.
On the other hand, if you’re starting from scratch in a new industry, and you start halfway through a financial year, you’ve only got a portion of the year to give it a good go. Or, you might initially spend a lot of time building a client bank or winning contracts. It could take longer to start creating the profit you’re going to need to afford the mortgage you want.
It’s worth bearing in mind that if you’re lucky enough to do well in your first year, you can get a mortgage realistically from that point.
How important is a deposit for a self-employed mortgage application?
It’s imperative. A conventional mortgage will require that 5% deposit at the very least, and that’s subject to all of the other numbers and other criteria fitting as well.
If you’re buying your first home, that deposit is going to come from your own savings or perhaps a gift from a family member. Believe it or not, there are lenders out there that will allow you to borrow money on an unsecured basis to fund your deposit.
That’s worth noting. You just need to make sure that it’s not borrowed from the same bank you’re applying with. Also, it could be that once you factor in the monthly repayments for that loan, it could throw out the affordability on the mortgage anyway. So bear those things in mind if you do entertain that option.
If you’re selling a house in the process, however, then hopefully there’s some equity tied up in that property that’s going to fund your deposit on the onward purchase. But unless you’re utilising some special scheme that we haven’t covered in this section, a deposit is very much key to the whole thing working.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.
Self-Employed Mortgages (Part 7)
Paul Holland is back to cover the last part of our Self Employed Mortgages podcast.
Can a self-employed person use income from savings when applying for a mortgage?
It really depends. There are a few ways it can be perceived.
Income from savings could mean an investment that gives some return, and interest payments you would have to declare and pay tax on. If that’s the case, then the answer is probably not.
If we’re referring more to pensions, these can be viewed as savings and any pension income can generally be factored into a mortgage application. If you’ve got a trust fund or you’re in receipt of a trust fund, again, we can make that work for you from a mortgage point of view.
Lastly, and probably most likely, this could mean retained profits within the business – funds that have built up in the company over the years. You could see these as company savings that you could access from an income perspective. We can certainly utilise those for a mortgage, although it’s quite complex. Not many lenders will do it.
It’s really going to be specific on a case-by-case basis. If that is the situation with your limited company, bring it to someone in our team and ask how that could benefit you. We’ll look at whether that approach is really worthwhile. Will a lender that uses that give you more benefits than a lender with another approach? It really is down to the individual situation.
What should someone do if they have been turned down for a self-employed mortgage in the past?
If you’ve been turned down for a self-employed mortgage in the past, it doesn’t mean that you will now.
It could, and it really depends on the underlying reasons for the decline. What was the reason? Was it a deal breaker across the board, or were you or your broker looking in the wrong place at the time? Has the issue been resolved? Could it actually have been placed at the time? That’s what we need to answer.
Anyone in my team can answer all of the above within a 10-minute phone call, a small amount of research, and a request for some documents from you – to make sure we have the right information.
If it really is a case that currently can’t be placed, we’ll provide you with a roadmap on how you can get where you want to be. It might be that you come back to me in one month, or it might be that you need to do certain things and come back in two years. It really does depend on the severity of the situation and the underlying reason for the decline.
What advice would you give to someone who has only recently become self-employed and is looking for a mortgage?
We advise people who are looking to go self-employed all of the time. I literally had two conversations this week with clients that were employed and exploring self-employment. [podcast recorded in January 2024].
People are more aware of the possible mortgage challenges now. I don’t know if mortgages are just in the news, or maybe we’ve just been shouting about it for long enough. It’s a good thing. People want to know if they’re going to trip themselves up later by making these changes, and the answer is they could. It’s always best to investigate.
There are three critical pieces of advice for anybody looking to make this switch:
- Hire an accountant from the outset.
- If possible, try to time it with the financial year to give yourself the best run at making a decent net profit in year one.
- Pay your tax.
We’ll come back to those three things in a minute. Most importantly, outside of those three things is to speak with your broker. If they don’t know much about self-employed mortgages, then seek out someone who does. Self-employed mortgages are way more complex than people seem to believe.
Don’t assume all brokers are versed in that space, because I can assure you they’re really not.
Just going back to the three points. If you are newly self-employed and you don’t know how the tax system works, an accountant is going to guide you in so many ways that could literally pay dividends, mind the pun, later on down the line.
Are you going to be a sole trader? Are you going to be a limited company? What’s going to be best for you and your set up? Those sorts of questions are really crucial in the early stages. Also, they’re just going to guide you on how to submit things to HMRC, record income and expenses, and make sure the taxman isn’t knocking at your door later on.
Timing it with the financial year is key. If you’re going to be a sole trader, the financial year runs April to April. If you start in November or December, you’ve got less than six months before you submit your first set of accounts. So the likelihood is you’re going to earn less in your first year than if you had a full 12 months to go at it.
Paying your tax is quite simple. A lot of people will tell us they’ve earned £50,000, but when they send us their tax calculation, they’ve declared less than that. Then they question us on why they can’t afford the mortgage they thought they could.
You can’t put income in for a mortgage unless you’ve paid tax on it, I’m afraid. So bear that in mind. Have a chat with a broker before you look to submit your tax return, to run some numbers before you start making any decisions. That should be able to give you the right guidance to get what you want.
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