As a self-employed person, you will need to ensure that you do plenty of research and seek advice before applying for a mortgage. Rebekah Commane finds out what you can expect
If you are self-employed, you may have heard that it is nye-on impossible to get a property loan. This simply isn’t the case. While the process is somewhat more complex, if you have all of the information to hand you can make your journey to securing a home loan a good deal easier.
In 2015, a study by the Office of National Statistics found that the number of self-employed people in Britain is at a 40-year high. This means that lenders would be turning down a large proportion of mortgage applicants if all self-employed individuals were rejected, so they will lend if you can prove you are a reliable borrower and have your accounts in order.
Affordability
Banks and building societies will assess each application on a case-by-case basis, just as they would for applicants who aren’t self-employed.
One of the main reasons lenders will require more paper work and affordability checks if you work for yourself is because your income may fluctuate. You may take in several thousand pounds in one month but less than half of that the next, so it’s difficult to gauge your ability to pay from your earnings. You’ll need to be able to prove that you have at least a somewhat predictable income to rely on. However, some lenders can be more stringent in terms of affordability than others.
What Mortgage spoke to experts at the Leeds Building Society and specialist mortgage lender Kensington to find out what steps you’ll need to consider to ensure you have the best possible chance of securing a home loan.
Accounts
“Be sure to have copies of your accounts to prove how much you have earned for at least the last three years,” Martin Richardson, director of business development at Leeds Building Society advises.
“In many cases, these accounts should have been prepared by a qualified accountant. These documents could also be supported by your SA302 (tax documentation), which would have been supplied to the Her Majesty’s Revenue & Customs (HMRC), and by the Tax Year Overview document the HMRC would have produced showing how much tax you paid in the financial year.”
There are some lenders who will consider only two years of accounts but most require three years.
Alex Hammond, head of marketing and communications at Kensington, points out that some lenders will accept less than three years of accounts and stressed the importance of seeking professional advice.
Hammond says: “At Kensington, we would always say that the best approach is to speak to a professional mortgage adviser who can search the market on behalf of a self-employed customer and recommend the most suitable product for their circumstances.
“Not only will you get guidance through the process, but an intermediary will also have access to lenders that are not available direct to consumers, including lenders that specialise in mortgages for the self-employed.
“There are some lenders that can work on the last year’s accounts for a self-employed person. This could be useful for the newly self-employed or business owners whose earnings have increased in the last year.”
Types of self-employment
There are various ways in which individuals can be classed as self-employed. They could work entirely for themselves in their own business, be a partner in a business or they could do contract work where they provide a service to various other businesses. So are contract workers subject to the same application process as other self-employed people?
“Contract workers by definition are similar to self-employed customers,” Richardson clarifies. “The main difference is that a contract worker is more likely to know the fixed term length of their current employment.
“For example, an IT professional working for a telecommunications company on a specific project for 12 months will be paid a daily rate. The customer could still be responsible for paying their own tax and National Insurance, although in some other circumstances contract workers are covered by PAYE. By comparison, a self-employed customer working as a sole trader will probably continue in that profession for an indeterminate length of time.
“In both instances, a lender would want to be sure of the level of income being generated in order to ensure the borrower can afford the mortgage.”
Business partners who own more than a certain amount of the business, generally 20 to 25%, are also classed as self-employed and treated as such by lenders.
Deposit
When it comes to the deposit amount for a mortgage, there may be a perception that self-employed borrowers will need to put down a higher percentage of the loan than those who work for someone else and may be restricted in the type of mortgage they can take out, but both experts point out that this isn’t the case.
“The majority of lenders tend to offer the same products and interest rates, and require the same size of deposit for both full-time employed and self-employed people,” says Richardson.
Mortgage Market Review
Last year, the Mortgage Market Review (MMR) rules were implemented which meant that lenders imposed stricter affordability checks on would-be borrowers to ensure they could make payments. Do these new regulations have a bigger impact on the self-employed?
“MMR was very much about the customer getting the right advice for their mortgage, as well as lenders ensuring customers could afford the amount they were borrowing,” says Richardson.
“For lenders to agree how much they could lend to an individual, they need to know what that person earns and what their personal circumstances are. This was broadly the same for lenders before the MMR rules came into place, so the ability of a self-employed individual to get a mortgage shouldn’t really have been affected.”
Finally, the importance of doing your research in advance of applying for a mortgage is stressed by both experts, as is seeking the assistance of a qualified mortgage advisor. Speak to your lender to assess what documentation you will need to produce and have everything ready when you apply for your mortgage
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Case study: Contract workers can secure a home loan
The majority of mainstream lenders place self-employed and contractors under much more restrictive criteria, this was certainly the case for Rose and Jake*.
Rose and Jake are in their early 30s and have been working as contractors so they could fulfil their desire to travel the world.
But now, they would like to buy a place of their own. They had found a four-bed end of terrace house in Surrey worth £499,500 and were hoping to borrow £325,000 to allow them to buy it.
Specialist mortgage lender, Kensington, has 20 years of experience helping self-employed and contract workers achieve affordable mortgages and knows who makes viable candidates. Like many lenders that specialise in lending to the self-employed, Kensington takes each case on an individual basis.
With Rose and Jake they were able to calculate an annual income for both, based on their current contract income over a 46-week period, taking into account all previous history of employment and credit evidenced by bank statements.
With this information they were able to help the couple realise their dream of a new home.
*Names have been changed.
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