Self employed mortgage considerations

It’s often said that after bereavement and divorce, moving house is the third most stressful thing we will ever do. On top of finding a house, negotiating a chain and the endless conveyancing and surveying fees, there’s the hassle of choosing and applying for a mortgage.

For self-employed professionals this can often be the trickiest aspect of relocating. Whereas employees can produce payslips and P60s to demonstrate their salaries, it’s far harder for those who work for themselves to prove what they earn. And because there is no guarantee that you’ll be receiving a stable income, it can be hard to find an understanding lender. In June, the Financial Times reported that in spite of recovery in the UK mortgage market, some banks are still reluctant to lend to the self-employed.

Before the financial crisis when the property market was at a peak, people who worked for themselves could apply for a self-certification mortgage, which basically involved them telling banks how much they earned. Unsurprisingly, these became less popular once the recession hit and they were eventually banned by the Financial Services Authority in 2011.

With the remaining options, making the right decision is far from simple, especially when there are so many options. Whether you‘re looking to move house or remortgage against your current property, there are a few key issues to think about.

Prove your worth

Ultimately, you’re assessed on your profits. Securing a mortgage is about amassing evidence of your income, so make sure you keep all of your invoices and financial documents. You may also need to show proof of some future work, so stay on top of chasing up your contracts.

In addition, if you’re working through a limited company, your income will probably come from a combination of a salary and the dividends you pay yourself – remember to keep all the details of the latter. Similarly, although some lenders may be willing to consider the profits retained within the business, others will not: you may wish to reconsider your financial strategy to pay yourself higher dividends.

If you’re a taxpayer who fills in a Self Assessment return and have HMRC calculate their tax bill may receive an SA302 form detailing your total income and tax owed. Should you fall into this category, be prepared to show the document to lenders.

If you’ve been in business for three years or more, then you‘re established enough to find that most of the standard options available to employees are also yours for the taking. However, if you haven’t been working for yourself that long, you’re likely to face more problems.

How much can you borrow?

If you have evidence of your accounts, you may find that documenting your income isn’t too difficult. Instead, it may be that establishing how much you can afford to borrow is the tricky part – because your income will vary from year to year, lenders are often wary of self-employed people applying for more than they will be able to repay if they have a difficult year. Estimating the repayments you can afford each month can be difficult.

Obviously, the size of your deposit will make a big difference. Contractors who are looking to remortgage will have less trouble, especially if they have already accumulated a healthy level of equity in their home.

You might find that your earnings have been increasing every year – for example, if you’ve taken on more work or given up another job to contract or freelance full time. In this case, lenders may consider using accounts stretching back two or three years. On the other side of the coin, you may have to accept that if last year’s earnings were lower than the year before, lenders will base their calculations on the smaller figure.

Stick to your guns

Contractors and freelancers can choose from a number of working options. But like many of your clients, lenders favour stability and once you’ve made a decision it’s best to stick to it. If you’re considering making the switch from a sole trader to a limited company or even vice versa, changing the structure of your company before applying for a mortgage could affect your chances.

Think outside the box
You might find that a traditional bank is the best option for you, but don’t limit yourself straight away. There are a number of different lenders available and some may be more sympathetic to self-employed professionals than others. The only way to find out is to explore all the options and then make the one that’s right for you.