It is a well-established fact that post Mortgage Market Review obtaining a mortgage as a self- employed individual is considerably more difficult than it was. With 4.6 million people self-employed in the UK (data from ONS) this leaves a large proportion of the population facing the prospect of not being able to get onto the housing ladder, re-mortgage or move home.
In our latest post we look at the issues facing those working for themselves looking to obtain a mortgage and show that whilst certainly tougher than for those that are employed it is still possible to obtain finance if you know where to look and what lenders require.
What is a Self Employed Mortgage?
The first thing to note is that there is no such thing as a self-employed mortgage product. You will be applying for a standard mortgage and will have to meet the same kind of income and affordability criteria as an employed individual.
This was not always the case. Pre financial crisis many lenders offered the ability for those working for themselves to self-certify their income and subsequently lend funds without any real proof of earnings or repayment ability. The level of take up of “Self Cert mortgages” and the abuse by some borrowers, stating income levels far in excess of what they were actually receiving, added considerably to the financial crisis and this practice is now no longer permitted.
What are lenders looking for?
Essentially when it comes to self- employed borrowers lenders are looking for evidence of income and affordability as with employed individuals. The evidence of income typically comes in the form of a minimum of 2 years of accounts prepared by an accountant if it’s a limited company or tax returns for a sole trader business.
As with all mortgage lending each lender has its own criteria and so it is important to use the services of a mortgage broker experienced in obtaining mortgages for the self-employed so that you not only select the most appropriate lender but provide the best possible case in your application.
How is my income assessed?
Income is typically assessed on the basis of average profits or salary and dividends over the past 2 years although some lenders will consider applications with only 1 year of accounts. Projected earnings are not taken into account.
The way in which your business is structured can have a bearing on how the lender treats your income.
Sole Trader or LLP – lenders look at client’s net income after expenses for the purpose of assessing income levels. Note for partnerships they will only take into consideration your share of the total income.
Ltd Companies – the majority of directors of Ltd companies are paid a combination of salary and dividend payments and most lenders will include both when assessing income. Some will use salary plus share of net profits which is good as for many growing businesses some elements of profits are re-invested to fund future growth.
Contractors – the remuneration due under your current contract plus other factors such as experience and length of time contracting and contract history will all have a bearing on how income is assessed by the lender. Some lenders will even annualise the day rate paid where a client has set up their own company.
Other things that could have a bearing on your ability to get a mortgage
- The maximum age limits that a lender will accept can be important. Typically business owners and those working for themselves are more likely to stay working for longer than those who are employed. Therefore finding a lender with a more flexible approach to maximum ages could be of benefit.
- Making pension contributions can also be advantageous as some lenders will allow longer terms and higher age limits to borrowers that can demonstrate an income beyond normal retirement age. It is important to note however, that pension contributions can have an impact on the assessment of affordability as they will be taken into consideration as a regular expenditure thereby negating any positive impact.
- Your taxation strategy may also need to be reviewed. Many self-employed and Company Directors will have been advised by their accountants to keep their income as low as possible to reduce their tax liability. This strategy however may not serve them well when looking to take out a mortgage as they will need to maximise income to ensure they meet affordability criteria. A discussion between your accountant and mortgage advisor is therefore important to ensure that the right strategy is adopted.
Help and Advice
Mortgage style is a group of Bristol mortgage brokers specialising in harder to place mortgages such as those for the self-employed.
If you need help to locate a suitable provider or just want to understand the amount of mortgage you may be able to obtain give our friendly team a call on 01275 370360 or 0117 907 0818 for an initial free consultation.
Tags: Self Employed Mortgage
This post was written by Marcus Robinson