Tricky... but not impossible
Whether you’re a company director, freelancer or contractor, getting a mortgage if you’re self-employed can be tricky – but it’s not impossible.
Armed with the right evidence, and with an application to the right lender, most self-employed borrowers should be able to get approved for a home loan.
So what can self-employed borrowers do to increase their chances of mortgage success?
Why it's difficult
Before 2007 self-employed borrowers rarely had a problem getting a mortgage. They could either apply for lenders’ mainstream rates or opt for a self-cert mortgage which didn’t require them to prove their income.
But self-cert mortgages were widely abused by all kinds of borrowers inflating their income to borrow more. Subsequently dubbed “liar loans”, self-cert loans were banned by the then-regulator the Financial Services Authority (FSA).
In theory, self-employed workers can apply for the same mortgages as employed workers, but some mainstream lenders with automated underwriting will automatically reject these applications.
As a result, self-employed borrowers should approach lenders who specialise in this part of the mortgage market and consider applications on a case-by-case basis.
Proving your income
The big issue for self-employed borrowers is proving their income to lenders.
Whereas employed borrowers can normally provide evidence of their past 12 months’ earnings via payslips and a P60, self-employed workers won’t have these documents.
However, there are other documents self-employed workers can put together to improve their chances of getting a mortgage.
The first is their accounts – it’s best to use an accountant to do this each tax year. Lenders vary on how many years’ accounts they need to see. Most require at least two years – so if you’ve just gone self-employed, you could struggle to find a mortgage.
Many lenders will also want to see a borrower’s past years’ SA302 forms. An SA302 is a form from HMRC which shows the tax paid. Alternatives are a 'tax calculation' or 'tax year overview' which are downloadable from the HMRC website.
Mortgage approvals are largely based on the amount of money you earn, so it’s a good idea to make sure your taxable income figure is as high as possible. Offsetting all your expenses to minimise tax is not a good idea if you need to borrow money.
As well as proving their income, self-employed borrowers also need to do the usual things all borrowers should do to make themselves attractive to mortgage lenders. These include cutting back on spending, having a good credit record and saving a decent deposit.
Types of self-employment
There are various types of self-employment and they will all be treated differently by different lenders.
Sole traders or freelancers typically work for a number of customers over the course of a year, or even each day. For example, freelance journalists.
Contracting is more common in industries such as IT or banking. Contracting involves working for one customer for a set period of time.
Company directors are also viewed as self-employed. One quirk of the mortgage market is that it can be easier for employees of a company to get a mortgage than the company director, despite the latter being paid a higher wage.
In some professions, it’s a good career move to become a partner in an established business. Solicitors, doctors, dentists and vets for example might be a “professional partner”. This type of working arrangement also counts as being self-employed.
Freelancers - which lenders to go for?
In theory, freelancers or sole traders with a couple of years’ accounts should have access to mainstream mortgage rates from across the market.
Some lenders will take an average of the past two or three years’ profit, rather than just looking at the past year. As a rule, any fluctuations in income will need to be explained and this can be tricky.
Those with a shorter trading history will be better off approaching specialist lenders.
David Hollingworth of broker London & Country suggests Kensington, Saffron Building Society or Precise Mortgages as lenders that will consider cases where there is as little as 12 months’ track record.
Contractors, partners and company directors - which lenders to go for?
When it comes to contractors, lenders generally want to see a track record of a couple of years. However, new contractors should look at Halifax, Clydesdale Building Society, Metro Bank and Leeds Building Society as well as Kensington and Precise Mortgages.
Company directors typically pay themselves a small salary plus dividends or choose to retain profits in the business – this can be tax efficient but mean their income appears low to mortgage lenders.
Harry Arnold, associate director at mortgage broker Anderson Harris, suggests company directors look to lenders such as Coventry for Intermediaries, Halifax and Kensington.
Ipswich Building Society offers mortgages to professional partners and will look at a partnership’s trading history as well as the individual borrower.
Should you use a broker?
Many lenders that are happy to lend to self-employed borrowers only sell mortgages through intermediaries. This means you’ll need a mortgage broker to talk you through your options and submit an application on your behalf.
A good broker will know the lenders to approach based on varying factors including your business set-up, profession, trading history and allowance of retained profits.