With Help to Buy schemes such as equity loans and shared ownership, the government has supported hundreds of thousands first time buyers who would otherwise have struggled, with help getting onto the property ladder.
But the self-employed still find themselves in a precarious position when it comes to taking out a mortgage. Before the 2007 credit crunch, self-employed workers could apply for ‘self-certification’ mortgages where borrowers didn’t have to prove their income using bank statements or payslips; instead they simply told the mortgage lender how much they earned.
While these self-certified mortgages were aimed at freelancers, contractors and business owners, the loans were also sold more widely, leading to abuse of the system where people simply exaggerated their income in order to secure a bigger loan. The result was a ban on self-certified mortgages, making the task of securing a mortgage much harder for the self-employed.
What do the self-employed need to get a mortgage?
While the ban shook the market, it certainly didn’t make getting a mortgage impossible. The main difference is that the self-employed need to prove their income, with most lenders wanting to see at least two years worth of accounts and tax returns. The more proof the better; having an accountant, a track record of regular work, a sizeable deposit and a good credit history will go very far in securing a loan.
Lenders generally base their calculations on average profit over the last few years, so having an accountant - preferably chartered - will help enormously as it takes a significant amount of paperwork off the shoulders of the applicant and reassures the lender that all boxes will be ticked.
If applicants don’t have two years worth of accounts, the application will often still be considered if it’s backed up with a track record of regular work, a large deposit or equity in an existing property, and great credit score.
How different types of business affect mortgage applications
Contractors, the self-employed and business owners all have three main business structures to choose from, each of which will have a slightly different impact on how lenders view their income.
Sole traders work, unsurprisingly, solo. Keeping records is straightforward and as long as there is a certain amount of organisation, lenders will simply assess income based on the sole trader’s profits. Completing tax returns through self-assessment means HMRC calculates everything through their system, and the applicant will get a form called an SA302 showing total income and tax due. This form will be needed as part of the mortgage application.
If the mortgage applicant has set up a business with a partner, the lender will want to see each partner’s share of the profit in order to gauge income.
Limited companies mean the business income is separate from the applicant’s personal income. The company will have a director and, in most cases, a company secretary. Applicants will pay themselves a basic salary, topped up with dividend payments. Lenders will want to see the full picture when considering mortgage affordability.
How a mortgage broker can help
A broker can play a crucial part in the self-employed mortgage application process. They’ll know which lenders are most willing to lend, which lenders accept fewer than two years of accounts, and which lenders offer the best rates.
A broker can place themselves in an advisory position, ensuring applicants tick the right boxes and manage their income in a way that more easily secures a mortgage. There are a few rules of thumb that applicants need to bear in mind:
- Keep up-to-date records of all income and expenditure
- Hire a certified or chartered accountant
- Speak to a broker about all available options
- Avoid minimising income too much for tax purposes, as this can affect securing a mortgage
For more tips and advice on how brokers can grow their business, be sure to check out Accord’s Growth Series.