Originally published 21/08/19
Self-employed people now account for a sizeable proportion of the UK workforce.
In fact, official figures show that 4.37 million people in the UK were self-employed between October and December 2023.
But since they don’t have a regular monthly salary, it can often be difficult for them to obtain a mortgage from a mainstream lender and prove that they can repay a loan.
As a result, many are turning to mortgage brokers for highly specialised advice, particularly if they’re trying to buy a home for the first time.
So how can you help them obtain the right mortgage and achieve their goal of purchasing a property?
As they approach you with more complex needs and unpredictable incomes, the advice you offer could make a huge difference to their lives.
Self-employed people must be able to prove their income, and most lenders want to see a combination or one of the following - accountant’s reference, at least two years of finalised accounts and/or tax returns. The more proof the better, so having an accountant, a track record of regular work 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 may still be considered if it’s backed up with a track record of regular work and a great credit score.
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 a person has set up a business in partnership with another individual and they are applying for a mortgage, lenders will take into account the income from the partner who is submitting the application.
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.
Another way in which you can add value to self-employed clients is understanding exactly who is taking up this way of working.
According to data from the Association of Independent Professionals and the Self-Employed, the average age of the UK’s solo self-employed - entrepreneurs who don’t employ anyone else - is now 48 years old.
But it seems that many younger people are also exploring this option.
Research from Fivver shows that more than two-thirds of 16 to 26-year-olds are considering or already have side-hustles, freelance roles or are self-employed. The study also revealed that of those considering going freelance or self-employed, 59 per cent want to do so in the next year.
Interestingly, 60 per cent of the young people polled are already in full-time or part-time work, which suggests that we could be seeing more and more people moving away from traditional employment and taking charge of their own careers.
That, in turn, means brokers could be seeing many more people approaching with complex incomes and highly specific needs and circumstances, and be able to market their brokerage accordingly.
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 evidence, 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:
For more tips and advice on how brokers can grow their business, be sure to check out Accord’s Growth Series.
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