Laura Lamb, director of independent mortgage broker, The Mortgage Company, talks us through the planning and crucial “Do’s and Don’ts” if you are self-employed and hoping to secure a home loan
Figures released in the first quarter of 2016 revealed there are now 4.69 million self-employed workers operating in the UK.Freelancers and contractors now make up 15% of the overall workforce, according to the Office National Statistics.
Gone are the pre-credit crunch ‘self-certified’, ‘fast-track’ mortgages where you did not have to show any evidence of your income – ‘liar-loans’ as they were once dubbed. They have been replaced with more stringent affordability checks making it harder, but not impossible, for the self-employed to get a mortgage.
There are no self-employed mortgage products currently on the market. You will need a normal mortgage plus a 10-15% deposit like everyone else. Proving income and affordability is more challenging than for someone on the company payroll, especially if you only have a couple of years’ accounts but it doesn’t necessarily mean you won’t be able to get a mortgage.
As soon as you start thinking about needing a mortgage talk to your accountant, bearing in mind that some lenders require an accountant to be certified or chartered. Good accountants are not only there to help you stay compliant and be tax efficient, but they are also there to help you plan for the future.
A mortgage is a loan secured 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. Whether you’re employed, self-employed, 21 or 70 years of age the invariable requirement of all mortgage lenders is affordability based on your income and expenditure.
If you’re a sole trader or self-employed, lenders are only interested in your net profits, if you’re a limited company they’re looking at salary and dividends.
Check and plan your accounts
Net profit is your total revenue minus total expenses, so it is worth discussing whether your accountant is including items like use of home as office or mileage as expenses in your accounts. Although they are legally reducing your tax bill, they are also reducing your net profit which is the bottom line figure mortgage lenders are looking at. Start planning for your mortgage as soon you can.
Another thing to think about is your work vehicle, this is especially relevant if you’re a tradesperson. If your van/vehicle is registered in your name and you are personally paying for it, even if you’re taking money out of the business to cover it, it will be counted as a personal expense and will reduce your affordability.
Limited companies
If you are the owner/director of a limited company the same planning rules will apply to you. Although lenders are not looking for net profits, they will be looking at your salary and dividends and the money you’re taking from the business, again they’re looking at overall affordability.
There are steps you can take to enhance your chances of being accepted for a mortgage before you even apply.
- Take a regular salary or dividend rather than taking ad hoc lump sums from the business. This keeps your books as ‘tidy’ as possible for the underwriters.
- Choose a regular amount for a salary/dividend that will cover the cost of the mortgage repayments you’ll be applying for; if your existing mortgage/rent is less, then save the difference. It just shows you can afford the higher payments.
Saving is key
Regardless of whether you are self-employed or a limited company, saving is key to demonstrating affordability.
If you can regularly save at least the difference between your existing mortgage payment or rent, you are actively proving you can afford that repayment amount. Saving is, not a way to guarantee acceptance, as that depends on individual circumstances, but it is a key indicator for affordability.
Credit checks and credit history
Existing loans are not necessarily a problem, repayments will be factored into affordability, but pay-day loans are an absolute no-no. Avoid them at all costs.
Repeated credit checks carried out by third parties such as banks and retail stores will reduce your credit score. If you’re thinking about a mortgage be mindful of what credit you apply for. In the very early stages of planning for your mortgage get your credit score and report from a reputable agency such as Equifax, Experian or Call Credit.
Whether you think your score will be impeccable or embarrassing, it is important that your mortgage broker knows what your history is and if there are any credit issues that may cause problems. Even minor issues that may have slipped your mind such as missed payments on a forgotten store card or direct debit, forewarned is definitely forearmed in this instance.
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Case Study: We got there in the end
Dave (41) and Dora Waller (32) from Witney, Oxfordshire, have recently completed the mortgage process. Dave recently became self-employed as a full-time builder, carpenter and plasterer. Unable to get a mortgage six years ago when he was employed, because of a credit issue, their first mortgage was solely in Dora’s name.
Now with his company accounts in order, despite having less than a year’s books as completely self-employed, and regular savings, Dave and Dora have been approved for a mortgage but not without their fair share of worries and problems.
“All in all it has taken well over four weeks to get the mortgage approved, and by the only lender that would look at us,” commented Dave. “There were so many questions that had to be answered and they kept throwing us off, holding everything up by yet another ‘five working days’ while they sorted each of them out.
“They weren’t even major issues, for example, queries over Dora’s salary and bank statements because she buys the tea and coffee at work and gets repaid as expenses; my missed credit card payment issues from six years ago; why I was earning so much more now than previously – it’s because I am now completely self-employed.
“It has been incredibly stressful with the continual queries and not knowing if we would be approved, especially knowing only one lender was willing to offer us a mortgage in the first place. Luckily we had a great mortgage advisor who got us through everything and we are now looking forward to finding a house and moving out of our flat.”
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Don’t despair
Overdrafts, credit issues, fluctuating books, as long as you are saving sufficiently to help prove affordability and your broker knows all of these details, they will be able to approach lenders to discuss your circumstances on your behalf. For example, if investment in equipment has brought down your net profits recently they will take this into account.
Lenders are only ever going to look at filed figures and not projection, but they can request an accountant’s certificate to verify certain snippets of information, such as investment, to confirm the facts. They can also request information from the Inland Revenue itself which will verify your income. Again your broker will be able to help if there is a case to provide these.
Less than two years’ books?
A proven track record of net profits in other businesses, or if you’ve recently left employment to work as a contractor within the same industry, may be sufficient for a very small number of lenders. A few will accept applications with only one year’s accounts or less, but this is in a very small number of cases and one year’s books or less may not be acceptable.
Always use a broker
Because your mortgage is essentially a loan secured against your home, and your home may be repossessed if you do not keep up the repayments on your mortgage or any other debt secured on it, using a broker is highly recommended, especially as applying for mortgages for the self-employed is not always straightforward.
Brokers have access to many more products and will find the most appropriate solution on the market. They speak directly to lenders and will explain any unique circumstances, provided they have all the information they need.
A broker will explain everything to you in a language you’ll understand ensuring you are fully informed on the mortgage they recommend for you; and make sure you are aware of the risks of repossession if you can’t keep up repayments.
In a nutshell
- Speak to your accountant as soon as you start thinking about a mortgage to maximise your net profits.
- Find a good mortgage broker.
- Take a regular salary/dividend large enough to cover future repayments.
- Start saving monthly. Put away at least the difference between your existing rent/mortgage and your expected future repayments.
- Get a credit report and share this with your broker.
Although there is no guarantee your application will be accepted even if you follow all the suggestions above, as acceptance is dependent on individual circumstances, the key thing to remember is proving you can afford the repayments. Do all you can to prove this in the 12-18 months prior to applying by maximising net profit, taking a regular salary, saving and keep ‘tidy’ books to give yourself the best chance of being accepted.
