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Mortgages for the Self Employed

Some lenders might be cautious if you’re self-employed, but to us it means you’re committed and self-sufficient. We can work together to get the right mortgage for you.

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Getting a Mortgage When Self Employed

The UK employment market has changed dramatically in the last 20 years, with those registered as self-employed now accounting for around 15% of the working population. The mortgage market, however, has seen substantial changes, which has lead to lenders becoming increasingly stringent in their approach to mortgage underwriting, resulting in a much more cautious attitude to affordability.

Those in self employment often find providing acceptable income evidence to a lender a more difficult proposition to those in employment. Much of this is due to the different ways of evidencing self-employed income, particularly with many lenders needing to see a historic overview of income declared. In order to prepare, therefore, it’s important to get your house in order, along with ensuring your company accounts are up-to-date and filed filed with HMRC, your personal tax returns completed, and all other relevant taxes are paid on time – doing so will help give you the best possible chance of obtaining the mortgage you need.

Self-Certified Mortgages

Prior to the 2007 financial crisis, it was common-place for many lenders to allow an applicant to self certify their income – disclosing their annual income without any form of documentary evidence. However – as with a number of other mortgage criteria changes – lenders stopped providing self-certified mortgages, resulting in them being banned by the regulator.

How do I Prove Self Employed Income?

Given the demise of self-certified mortgages, when it comes to obtaining a mortgage as a self-employed person, you must be able to prove your income to get the mortgage you need. There are a number of ways a potential lender may evidence self-employed income, such as:

  • Tax Calculation Forms (a form which confirms the income declared during the tax year)
  • Tax Overview Forms (a form which confirms the income tax paid as a result of the income declared)
  • Company Accounts (usually produced by an accountant or obtained through an accountant’s certificate)

The documents required to evidence income will depend upon a number of factors, including the lender selected, and the type of self-employed income declared.

Can I Get a Self Employed Mortgage Without Proof of Income?

Regulatory changes made by the FCA have placed the responsibility of ensuring lending is conducted in a responsible manner on the lender rather than the borrower. Due to this, all mortgage companies are obliged to lend in a responsible manner, which results in a requirement for them to make sure that a borrower is able to afford the debt, and other regular commitments, now and in the future. Whilst some lenders are now able to use banking data for existing customers to assess income based upon income credits received into their current account, in the majority of cases a lender will require the relevant paperwork so they can show regulators that they have taken the necessary steps to evidence that a potential loan is affordable.

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Types of Self Employment

The most common types of self employment are sole traders, partnerships and limited companies. How an individual is set up in this regard will dictate the type of income that they receive, and therefore the way a lender assesses the borrower’s income and affordability.

How Long do I Need to Have Been Self Employed?

There is no one answer to this question. Whilst many lenders prefer to see two years worth of self-employed accounts (sometimes three years), there are a growing number of lenders who will lend if the borrower has been self-employed for one year. In certain circumstances – like mortgages for doctors and solicitors – it may be possible to obtain a mortgage without any evidence, for example, those who are buying into an established practice with previous sector experience.

Mortgages for Sole Traders & Partnerships

For individuals set up as either a sole trader or in a partnership, the income that a lender will tend to use for their affordability calculation is the business’s net profit, meaning the income declared for tax purposes after the deduction of all costs and expenses.

Mortgages for Directors

For those acting as a director of a limited company (plus shareholders whose shares exceed 10-20%), the incomes that are usually taken are salaries (as directors are seen as employees of the business), together with dividends from whatever profits that the company produces. The actual income that a lender will use for their assessment does vary however, with some working with the salaries and dividends taken, and others having a closer emphasis on the company’s net profit.

Mortgages for Contractors

A growing trend is for individuals to act as a contractor – either as an employee working on a fixed or short term contract (regularly seen within government/engineering roles), or on a self-employed basis working for one company (often within IT roles or consultancy). Again, the evidence required by a lender to satisfy affordability varies. Some companies look at the long-term income from these roles, whilst others are often more generous, and look at the total income that the contract could provide. Many lenders are entering this growing market, each with a different lending ethos. The increased options available often results in far greater borrowing potential and reduced costs for the potential borrower.

CIS mortgages – short for Construction Industry Scheme – applies to workers who are self-employed individuals sub-contracting for a contractor, and who therefore receive their income after the 20% basic rate income tax has been deducted.

Whilst the majority of lenders assess these individuals on the same basis as a sole trader – including using income from net profit after the deduction of expenses – there are a number of lenders that will instead treat them as employees of the contractor, and use the income collated from a number of months’ worth of CIS vouchers (similar to employee’s payslips) rather than net profit. This very regularly leads to a significant increase in the amount of income assessed for affordability, and therefore the availability of a much larger mortgage than one on a self-employed basis.

Lenders for the Self Employed

There is a growing appetite within mortgage lenders to lend to self-employed clients, which is particularly driven by the growth in this sector. Given the various scenarios that exist within the world of self employment – and the differences in lender criteria – matching the right lender to the borrower’s individual circumstances takes substantial knowledge and experience.

For example, a business may have seen a substantial increase in profitability, meaning the right lender would be one who is able to accept the latest year’s income alone. Similarly, the business may be very new, so it would be necessary to find a lender who will look at one year’s self employment. Often, directors take out less dividends than is readily available, and as such a lender would be sought to look at the underlying profitability of a business, rather than purely the salary and dividends paid. All these circumstances and many more can be catered for by ensuring the mortgage is placed with the most appropriate provider.

Self Employed Mortgage Broker

Using a broker who understands the different lender criteria is key to establishing the most suitable mortgage to proceed with. Choosing the right lender can often increase your lending capacity by tens of thousands of pounds. It can also save thousands of pounds in interest over the life of a mortgage. Choosing a broker who understands this complex market is essential, and approaching the wrong company can lead to a perfectly good case being declined if presented to the wrong lender – which can cost time, money and even lead to the loss of a dream home.

Self Employed Mortgage Calculator

See How Much You Can Borrow

Use our free and simple to use self-employed calculator to help you establish the likely loan you may be able to achieve. Of course, the figures provided are purely an indication of what may be available after further assessment but this is your first step to finding out what mortgage we can arrange for you. Our advisers will be happy to give you an accurate indication of the best options available to you upon completion of a full assessment of your circumstances.

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