In recent years there has been a sharp rise in the number of self-employed people in the UK. The Guardian reports that the number of people working for themselves has risen from 3.3 million to 4.8 million since 2001 and this number is set to increase in coming years.
But, does the fact that more and more entrepreneurs are going it alone mean that millions of people are going to struggle to get a mortgage? In our essential guide you’ll find out everything you need to know about getting a mortgage if you’re self-employed.
The recent history: the end of ‘self-certification’ mortgages
One of the major consequences of the global financial crisis a decade ago was the end of ‘self-certification’ mortgages. These deals allowed people to borrow without having to prove their income and suited many self-employed applicants whose income came from a range of sources and where it was difficult to evidence.
These types of deal no longer exist, and so it means that if you’re self-employed you will have to prove your earnings when you apply for a home loan.
Most mortgage deals are available to self-employed applicants
Aldermore Bank says that research it has carried out shows that almost a third (30%) of self-employed homeowners believe the mortgage process is biased against them.
The truth is that, in theory, self-employed applicants have access to exactly the same range of mortgage deals as PAYE borrowers. If you work for yourself, you can apply for any of the deals that you see in the ‘best buy’ tables.
The only difference is in the way that the lender underwrites your application. You will have to prove you have the income necessary to support the mortgage.
Charles McDowell from Aldermore says: “Ultimately, when assessing a self-employed mortgage applicant, a lender needs to make a judgment on two areas: How much is this applicant earning? And how confident are we they will sustain that level of earnings?”
How you prove your income if you’re self employed
If you’re self-employed you will have to prove your income to a potential lender. You can typically do this using two years’ worth of company accounts, SA302s or tax returns (some lenders require three years’ worth).
If you work as a contractor, then you may also have to provide evidence of work you have planned for the future to demonstrate your current levels of income can be maintained.
You may also have to provide bank statements to prove that your new mortgage is affordable to you.
If you don’t have accounts or record for two years, don’t panic. You may still be able to get a mortgage with one year’s accounts.
Mortgage expert Andrew Montlake says: "There has been a vast improvement over the past year or so in lenders looking at offering solutions for the self-employed, with some now able to lend to those with only one year’s accounts providing they have prior experience in their industry.”
Specialist lenders, such as Precise Mortgages, Kensington, Vida Homeloans, Aldermore Bank and Kent Reliance may consider applicants with one year of accounts. Other lenders have introduced s0-called ‘complex mortgages’ aimed specifically at the self-employed.
Industry expert David Hollingworth says: “A lot comes down to the specific circumstances of the case as to whether a specialist product, that is likely to carry a slightly higher rate, is required, or whether there could be a more mainstream option.
“For example, if there was a history of employment in the same business before switching to contracting, some lenders may be able to take a look.”
One of the issues facing may self-employed borrowers is that their company accounts may deliberately show a minimal amount of profit so as to reduce the tax bill. While this may be good for paying less tax, it can make it more difficult for you to get the mortgage you need as your net profit figures may be quite low.
How your self-employed status affects your mortgage
There are many ways of structuring your self-employed business. This means that your mortgage application will be assessed differently depending on whether you’re a sole trader, a contractor, a partner or a company director.
If you’re a sole trader, your income will be assessed depending on whether your income has increased or decreased in recent years. If your income is increasing, lenders will usually take the average income from the past two or three years. If it has gone down, lenders are likely to use the latest and lowest figure.
If you’re a contractor earning a day rate, lenders usually multiply the rate by the number of working days in the year. They may also need at least a year’s contract history.
If you’re a limited company director, then your income can be assessed by two methods. The first is to calculate your income based on salary and any dividends from the business. The second option is to assess your in addition to retained profit in the company.
Where to get a mortgage if you’re self-employed
As we mentioned earlier, self-employed people can access pretty much any mortgage deal in the marketplace, from any lender.
However, underwriting criteria can vary from lender to lender. Some require a years’ worth of books, while others will want to see a full three years’ accounts.
Consulting a mortgage broker can be one way of finding the right mortgage for you. As broker Shaun Church says: “As the means of calculating income and eligibility can vary considerably, the trick for self-employed borrowers lies in ensuring they apply with a lender that will view their circumstances most favourably.
“Seeking independent advice through a broker is therefore critical, as they can point you in the direction of lenders not only willing to lend, but also those likely to provide the most favourable deal.”
If you want to be sure that you can get the mortgage you need it can also be sensible to get a mortgage agreement in principle. Read our complete guide to getting a mortgage decision in principle.