The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years. The number of self-employed workers increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017.
There is a common myth that it is a struggle to obtain a mortgage if you are self-employed, or that lenders do not have an appetite to help you. Indeed, research by Aldermore Bank showed that 30% of self-employed home owners believe that the mortgage process is biased against them.
The reality is that there is no bias against self-employed clients. In fact, some lenders have criteria in place specifically to be flexible for these clients! The same rates and same options are available as those that employed clients have access to.
What is true, however, is that the income structures of self-employed clients are more complex. As we stated in last month’s article on complex income structures, it is crucial for self-employed buyers to speak to an adviser with access to as many lenders as possible.
Types of self-employment
How you are set up as a self-employed client is important when looking to navigate mortgage options. Typically you will be set up as:
- A sole trader,
- A contractor,
- In a partnership, or
- As a company director
For sole traders, lenders will use a client’s net profit income figure in the same way as an employed applicant’s basic salary. For those trading for two or more years, a lender will typically use an average of the last two years’ net profit for affordability purposes.
We also have access to some lenders who can work on one year’s trading, or even on the latest years only if this has increased. The same applies for clients in a partnership, looking at the annual profit from the partnership.
Contract workers have become an area of increasing focus for lenders. Contractors will often earn a day rate, may have also set up their own company or may be getting paid via an umbrella company. There are lenders now who specialise in this area and will multiply the rate by the number of working days in the year, typically looking for a year’s contract history.
Limited company directors’ income can be assessed by two methods. The first is to calculate their income based on salary and any dividends from the business. The second option is to assess the director’s salary in addition to operating or net profit in the company.
A good broker will be able to help look through your tax year calculations and company accounts to know where the best option will be. They will have access to the more specialist lenders who will be able to use the operating or net profit figures.
This can boost a client’s maximum borrowing potential significantly. We also have access to some lenders who, although using the salary and dividend figures, will take into account the surplus net income of a client paid via dividends to an employed client and so will offer an increased borrowing amount to these clients specifically.
Documentation requirements
One of the main issues self-employed clients often cite as a major frustration is the documentation requirements.
A good adviser will ensure that documentation requirements are discussed in full with the lender pre-application to ensure there are no delays. They will also help a client in understanding where to obtain these documents and exactly what the lender requires. A broker will also be able to look through the accounts like an underwriter, so that any questions the lender may ask can be spotted in advance.
Typical requirements that are good to have ready are:
- 2 years tax year calculations and tax year overviews. These can be obtained via your accountant or directly from HMRC. They can normally be accessed and printed out online, which is a real time saver.
- 2 years full company accounts (for partnerships and company directors). These need to be signed by the accountant and the company director.
- Accountant’s reference – some lenders will have an accountant’s reference template that can be used instead of the above, which can streamline the process
- 3 months’ personal and business bank statements.
- An updated CV and two-year records of contracts for contractor clients.
Case study
Let’s take a look at a case study. These recent Alexander Hall clients illustrate the above scenarios perfectly (names have been changed).
The clients:
A young professional couple, Graeme and Emma, were both first-time buyers and had found their dream property. Graeme is an IT contractor and Emma has her own dance class business.
The scenario:
Graeme and Emma had met with two high street banks that they had current accounts with. Despite their strong incomes and having saved up a 20% deposit, they were offered a lower loan amount than they had hoped for by the banks. They felt that their income status was not being looked at fairly.
Despite Graeme having a 12 month track record, both banks wanted accounts for his limited company, which were not yet available due to the lack of trading period. Emma had two years’ figures but her income figure was much higher in the most recent year and the banks would only take an average of the two.
So, despite the monthly payments being very comfortable, the clients had been advised that their dream property was out of their reach. They were given a budget that meant either looking in a different location or at a smaller property.
The solution:
We spoke to a lender that agreed to use Graeme’s day rate, with a calculation of five working days and 48 weeks per annum. They were also more flexible in assessing Emma’s income. This meant that the property they had fallen in love with was now within their borrowing means.
The rate offered by this lender was also lower than those being offered by the two banks the clients had initially spoken to. Their monthly payments are also now lower as a result.
A mortgage offer was secured in two weeks and the clients were looking to move into the property by the end of that month.
Property value: £500,000
Loan amount: £400,000
Loan-to-value (LTV): 80%
Rate: 1.67% 2 year fixed
Annual Percentage Rate of Charge (APRC): 3.7%
Term: 30 years capital and interest
Lender arrangement fee: £1,499 added to loan amount
Mortgage payment: £1,260pcm (per calendar month)
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
