How does the self-employed income support scheme affect mortgage applications?

Brits aged between 18-40 say their top life goal is homeownership according to a Santander survey with concerns about rent prices and desires for security trending as two of the top reasons as to why they were so keen to get a mortgage and get onto the property ladder. 

In fact, these potential first-time buyers put owning a home above getting fit or even having children.

Can self-employed people get a mortgage?

But 2020 certainly hasn’t been kind to the youth of Britain and dreams of homeownership feel dashed for some. 

The good news is that even applicants who have been furloughed or are receiving income from the Self Employment Income Support Scheme, may still be able to apply for a mortgage, depending on their circumstances. 

We’ve answered the most pressing questions to help you find out where you stand, how much the SEISS could pay out for you as well as how it can be spent.

What is the SEISS grant?

The Self-Employment Income Support Scheme grant provides critical support to the self-employed in the form of grants, each paid directly into the bank applicant of the worker if they meet the criteria. 

How many people in the UK have applied for the SEISS so far?

• The Coronavirus Job Retention Scheme received 9.6m applications as of October 2020 whereas the Self Employment Income Support Scheme received 2.3m claims. 

• By 30 September HMRC had received 1,603,000 claims from men totalling £4.4 billion compared to 655,000 claims from women for £1.3 billion. 

• Perhaps reflecting their relative size, the 2 regions with the highest number of claims are London (447,000) and the South East (326,000).

What is the eligibility criteria for a SEISS grant?

To be eligible for the first two grants:

• Applicants must have submitted a Self Assessment tax return for the 2018/19 tax year, which included self-employment profits, by 23 April 2020. 

• They also must have been self-employed in the 2019/20 tax year and traded for at least part of that year

• They must intend to continue trading in 2020/21 for at least part of the remainder of the year (or would do so but for coronavirus.)

• Applicants must have been adversely affected at some point on or before 13 July 2020. For the second grant, you needed to have been adversely affected at some point on or after 14 July 2020 up to the closure of claims for second grants on 19 October 2020.

Was the SEISS scheme extended?

As the application end date passed for the second SEISS grant, HMRC found that just 67% of the potentially eligible population had claimed, with the average value per claim at £2,500.

That means that a whopping 33% neglected to claim, perhap because they didn’t know that they were eligible or missed the date. 

Originally, additional support was going to be provided in the form of a third payout covering the period 1 November 2020 to 31 January 2021, providing recipients with 40% of three months' worth of their trading, capped at £3,750.

However, on 24 September 2020 a further extension to the SEISS scheme was announced by the Government who promised the same level of support for the self employed as is being provided for employees through the Coronavirus Job Retention Scheme which has also been extended until March 2021.

The additional support from the Government will now provide eligible self employed workers with 80% of three months' worth of their trading, capped at £7,500.

A fourth grant will also be available, to cover the shortfall of self-employed workers’ profits from February to April 2021 and details of this are expected to be published on the Gov.uk website in early 2021.

How much are the SEISS payouts and when do I need to apply by?

Eligible self-employed applicants may receive income in the form of four payouts. 

Can I claim the third and fourth SEISS grant?

• To be eligible for the grant extension self-employed individuals, including members of partnerships, must:

• have been previously eligible for the Self-Employment Income Support Scheme first and second grant (although they do not have to have claimed the previous grants)

• declare that they intend to continue to trade and either:

• are currently actively trading but are impacted by reduced demand due to coronavirus

• were previously trading but are temporarily unable to do so due to coronavirus

SEISS 80% payout example

To calculate how much you can expect to be paid by the third SEISS grant now that the scheme has been extended, refer to your first payment which was also calculated at 80% of 3 months average monthly trading profits between the tax years of 2016 - 2019. 

As an example, Alex is a self-employed builder who has completed his tax return for the last three years. His annual profits are as below:

• 2016/17 tax year £21,000

• 2017/18 tax year £22,000

• 2018/19 tax year £25,000

His grant is calculated by adding £21,000 + £22,000 + £25,000, which totals £68,000 and averages at £22,666 per tax year. 

If we divide £22,666 divided by 12, we find that his average monthly earnings are  £1,888.88. 

80% of that is £1,511.11, so as the SEISS grants pays out 80% of three months average earnings, Alex would receive £4,533.33 in one lump sum, paid into his bank account.

(£1,888.88 x 80% x 3 = £4,533.312)

Can I apply for a mortgage with income from the SEISS grant?

Each bank or mortgage provider will have different rules about what they can or can’t accept and most prefer to see a steady and reliable stream of income vs outgoings. 

In light of Covid-19, a handful have made an exception and are willing to accept income from a SEISS grant rather than discount it, leaving the application with an otherwise dip.

If you decide to apply for a self employed mortgage, you should be prepared to provide three months of bank account statements and at least two years of accounts ideally, though this will vary. 

There will also be other eligibility criteria to meet, which will vary depending on your chosen lender but your mortgage broker can separate the pros and cons of each agreement and present you with the lenders that you’re eligible for. 

Some lenders that take Government Self Employed Income Support grants into account on mortgage applications also ask for a letter confirming eligibility for the scheme. 

Applying for a self employed mortgage during Covid-19 can feel a bit daunting but there are UK lenders that have made adjustments to their criteria.

Can I remortgage with income from a SEISS grant?

Remortgaging can help some homeowners switch to a cheaper, lower rate but some lenders will assess affordability as if the applicants were new borrowers, leaving some self employed homeowners worried about whether they’ll end up stuck in their current contracts.

Rates in the UK for mortgages are currently low in comparison to previous years, with the Bank of England's rate set at just 0.1% so it’s no wonder that so many people are interested in switching their mortgage, especially given that many people’s income has dropped to the 80% provided by the SEISS grant.

With the help of a broker, it may be possible to find a lender who accepts a reduction in income, as well as income from a SEISS grant as opposed to or as well as your usual income from your self-employed position.

While it’s true that some lenders are approaching SEISS income by a case-by-case basis, there are exceptions. Speak to one of our experts who can help prepare your application for a lender that is more likely to accept you. 

Can I use part of my SEISS grant as a deposit for a mortgage?

Your income may have reduced as a result of Covid-19 but you may find yourself in the position of being able to save part of your grant, either to repay debt or as a deposit. 

Seeking financial advice is recommended as it may be the case that if you have any money left over after using the grant to cover your usual outgoings, whether personal or business, it could be more beneficial to pay off debt in the lead up to making a mortgage application. 

Your broker can also advise you on credit issues and whether lenders would be more accepting of you as a borrower if you repaid debt versus saved your SEISS grant as a deposit.

Your circumstances will really affect what’s best for you but transferring regular payments to a savings account can help to boost your credit score and build a history of money management, which could affect your ability to get better rates for mortgages. 

How much deposit would I need to save for a self-employed mortgage?

Deposit requirements contractors and freelancers can range between lenders too, with some asking for 10% deposits and others requiring as much as 30% of a properties’ market value. 

If you haven’t been self-employed very long, mortgage lenders might ask for a larger deposit and unfortunately, as a result of your short-time in self employment you might not be eligible for the SEISS grant.

Whatever your circumstances it can be a good idea to save as much deposit as you can where it is affordable, as this can help you access better rates and will mean you own more equity in your property up front. 

See the table below to see how a deposit requirement could affect how much you could need for various property values. 

Making an application for a self-employed mortgage with a SEISS grant

Interestingly, the sector with the highest number of potentially eligible individuals for the SEISS grants is the construction industry. By 30 September 2020, construction workers had made 772,000 claims for SEISS totalling £2.4bn but thousands missed out.

See the Government website to check your eligibility for the SEISS extension as you don’t want to miss out on financial help that you’re entitled to and then ask a broker how the payments affect your ability to get a self-employed mortgage.