Many people believe they won’t be able to get a mortgage if they are self-employed. Fortunately, the situation is more positive than you might think. There are various options for the self-employed.
Self-employed numbers have grown in the UK in the past 20 years. According to the Office for National Statistics, there were more than five million self-employed people in the UK by the end of 2019. This was up from 3.2 million in 2000. Self-employed people represent 15.3 per cent of the working population in the UK – an increase of 12 per cent from 2000.
If you have struggled to get a mortgage before, maybe you weren’t speaking to the right lender or broker. ‘It’s all about getting a good broker with access to a wide range of mortgage products,’ says Monica Bradley, MBA’s Managing Director. ‘A good broker will have every base covered. We have clients who are self-employed as sole traders, company directors and contractors.’
We answer some commonly asked questions about getting a mortgage when self-employed and explain why you shouldn’t give up…
What if you haven’t been self-employed for very long?
There are specialist lenders who will take your application into account if you’ve only got one year’s worth of accounts. Lenders may be more receptive if your business is in an industry you’ve worked in for a long time. MBA’s Senior Mortgage and Protection Adviser, Phil Leivesley, says: ‘The vast majority of lenders require two years’ worth of accounts, although there are still some options for applicants who might only have evidence for one full year. For professionals, for example; doctors, dentists, accountants, lawyers and engineers, it might be possible to proceed, even if they do not yet have their first year’s accounts.’
What paperwork do you need to provide?
Lenders will usually ask to see bank statements and an SA302 form that shows your income for each tax year. If you file your tax return online, you won’t have a printed copy, but you can log on to the HMRC’s website and download one. They may also ask for your accounts and information from your accountant.
‘Have all of your documents ready, specifically those that evidence your earnings, such as Tax Calculation Forms and accounts,’ says Phil. ‘Seek the advice of a broker in advance of any prospective mortgage application. They can help you to plan ahead.’
The exact paperwork you need depends on your self-employed status. ‘For a sole trader or partner in a partnership, we would typically require the latest two years’ Tax Calculation Forms and Tax Year Overviews,’ says Phil. ‘For a director of a limited company with a shareholding of greater than 20 per cent, we would also require full accounts for the business for the most recent two years.’
How are your earnings assessed for a mortgage if you are a sole trader?
If you are a sole trader, how much you can borrow will depend on whether your earnings have decreased or increased. If your income has gone up lenders will normally take your average income from the past two years. If your earnings have gone down, they will use the lowest figure.
What if you are a contractor charging a day rate?
When it comes to assessing what you can borrow, lenders will normally take your day rate and multiply it by the number of working days in the year. You will usually also be asked to supply a history of your contracts over the past year or two to show consistency.
What if you are a director of your own limited company?
There is a common misconception that dividends won’t be taken into consideration by lenders. This is not the case. ‘Most lenders will take into consideration dividends plus your PAYE/director’s remuneration, so it is fine to take income as dividends,’ says Monica. ‘For people who don’t want to take their income out of the company, some banks will accept profit after tax plus PAYE/dividends.’
Should you increase your income if you run a limited company?
If you pay yourself a salary and/or dividends out of your own limited company, it’s wise to pay yourself a higher slice of the profits to boost your mortgage application. ‘Many lenders will look at income and not profit,’ says Monica. This may help your application.
Try to avoid making any major changes to your business. It helps to show a consistent and stable company structure.
What about your personal spending?
Avoid any luxury purchases, keep your bank statements to hand and try not to take out any new loans unless absolutely necessary. A consistent pattern of earnings and outgoings will help.
Case study: ‘A good broker is there to help you’
Andrew McQuater is a self-employed tennis coach who almost lost his dream house until he heard about MBA…
‘I have played tennis all my life and at the age of 24 I became a self-employed professional coach. I have been at the Queens Club now for 13 years where I coach all different ages and abilities.
‘When we found our dream house, we originally went to another broker. I supplied him with everything he asked for and two weeks in, and after a lot of sleepless nights, he said he couldn’t get us the money we needed.
‘I quickly was told about Phil (Leivesley) from MBA by a friend. I contacted him straight away as the vendors were getting impatient. He asked for some details and then came back the next day and said he could help. He was extremely thorough. We supplied everything he needed. By this time we couldn’t believe how unprofessional the other broker was compared to Phil, and he got us the mortgage offer we needed. Without Phil we would have most certainly lost the house. From start to finish, Phil was upbeat, friendly and very informative – I felt a huge level of trust in him.
‘Being self-employed and getting a mortgage clearly isn’t impossible, but you definitely need a good broker. You need to be completely honest about your financial situation and let a professional get to work on your behalf. A good broker is there to help you, while a bad broker can ruin any chance of you getting a house – which would have happened to us if it wasn’t for Phil.’
Case study: ‘I was expecting to have to wait a few years’
29-year-old Lee Del Rosso is an Associate Dentist who works at a dental practice in Sheffield on a self-employed basis. He was surprised to find out he was able to get a mortgage much earlier than predicted…
‘I became self-employed when I started my associate role in September 2019. Before that, I was a student. I decided to apply for a mortgage last year with my partner. We found a property we liked within our budget and decided to put in an offer which was accepted.
‘I was really unsure about putting the offer in – I even explained to the vendor and estate agent about my self-employed status. My only faint hope was that my accountant offered to provide a financial projection to support my mortgage application as I didn’t have two years’ worth of self-assessment tax returns. My understanding was I might be able to get a mortgage, but I was fully expecting to have to wait a few years.
‘MBA was recommended to me by a friend who spoke very highly of the company. I cannot speak highly enough of the support I received from Phil (Leivesley) at MBA. Phil confidently managed my expectations, set out an initial plan and also explained alternative options should they be required. I explained my concerns around my self-employment, and he reassured me that with the correct supporting documents, there shouldn’t be an issue finding a suitable lender. The whole process was explained to me in understandable terms.
‘Having been self-employed for less than a year and also without a solid employment history while being a student, the fact I managed to get a mortgage is fantastic. It has enabled me to buy my first home three years before I thought I would be eligible for a mortgage.
‘When I have spoken to colleagues in a similar self-employed position they are surprised that I managed to get a mortgage so soon. It demonstrates that there is clearly a stigma associated with being self-employed and being accepted for a mortgage. And this is simply not true. I hope my case clearly demonstrates to others that self-employment is not as restrictive as they may believe.’