Self-employed mortgages – the key stats
Around 4.5 million people are now self-employed (15% of the workforce) – almost twice the level of 40 years ago.
However, when it comes to helping you buy your own home, the financial system has not kept up: only around 10 per cent of home loans since 2010 have been offered to the self-employed.
There are fewer options for finding a self-employed mortgage, and the cost is liable to be higher than if you are an employee.
Don’t worry we’re here to help!
The benefit of using a broker is that we can do the shopping around for you. In fact, we already know what lenders are more likely to lend to people who are self-employed.
If you are accepted, you should be offered the full product range, including fixed, variable rate and tracker mortgages. Not sure what these are? Then have a read here on the different types of mortgages.
How is self-employed defined?
If you are a sole trader, or hold a stake of 25% or more in a company, you will be treated as self-employed.
If two of a lender’s customers own 25% or more of a business between them, they may both be treated as self-employed.
The following may also be treated as self-employed:
- Sub-contractor with income from more than one contract
- Partner in a business
- A franchise owner
- Anyone employed by a limited company or limited liability partnership whose rewards package includes dividends and/or profit share.
If, as a sole trader, you are considering setting up a limited company, be careful. Lenders will tend to ignore your record as a sole trader and start from scratch by examining your limited company records, probably requiring at least two years’ accounts.
The income conundrum
When working for yourself, you have a big incentive to pay as little tax as possible. For anyone filing under self-assessment, the less you declare, the less tax you will pay. You or your accountant will know about a range of perfectly legitimate tax allowances and deductions which can be used to offset income and minimise the total. When thinking about your ability to borrow, however, remember that a mortgage lender will want that total to be as large, not as small, as possible. The higher your declared earnings, the more you can borrow.
The track record
The system has been tightened up in recent years. Like any employed applicant for a mortgage, you now need bank statements and details of debt repayments and outgoings such as childcare costs, holiday spending and pension contributions. But for the self-employed, the standard requirement is a verified record of the past three years of earnings.
Many businesses do not have a smooth upward trend in profits. You may have good and bad months or years, or you may be retaining equity in the business. Some lenders are put off by any downward trend; others may be more flexible. Many lenders will take an average of the past three years’ profits, while some may base their assessment on your worst year.
If you are a contractor and have formal contracts in place, with paperwork to show fixed earnings, you may not need several years of accounts. Lenders will normally run a full credit check on you and your score will form part of the assessment.
What about new businesses?
Some lenders may accept a two-year record, and some such are prepared to take your first year’s earnings as your income.
You could be asked to pay a higher mortgage rate than for a borrower with more track record and a higher deposit too. A typical deposit might be 20%.
The SA302 form, which declares income and profit to the taxman, will probably be needed, as lenders like to see exactly what is being declared.
Lenders may also require Tax Year Overviews produced by accountants and insist that the figures for tax due match up.
If you are self employed and are looking to get a mortgage, let The Mortgage Hut help you! Contact our team today.