At the end of 2019, there were more than five million self-employed workers in the UK. While working for yourself offers many benefits, dealing with the financial aspects of running your own business can sometimes be a challenge – particularly when it comes to getting a mortgage.
Research from Aldermore Bank has found that three in ten self-employed workers believe that the mortgage process is biased against people who work for themselves. While it’s true that so-called ‘self-cert’ mortgages are no longer available, many lenders are more than happy to lend to self-employed applicants, and you can typically access the same great deals as employed workers.
If you’re self-employed there are steps you can take to ensure you put yourself in the best position when it comes to applying for a mortgage. We’ve worked with hundreds of self-employed borrowers over the years, so here are three useful tips.
1. Understand how your business structure affects how much you can borrow
The way a lender assesses your income and expenditure when deciding what you can borrow will depend on the structure of your business:
- Sole trader – Lenders will usually work on your net profit figure. If your income has increased in the last few years, a lender will typically take the average. If it has decreased, they may use the last and lowest figure
- Limited company director – Lenders normally assess your income, either based on your combined salary and dividends or based on your salary and any retained profit in your business. Some lenders work out the amount you can borrow based on your previous few years’ income, whereas others calculate it based on only your previous year of trading
- Partnership – Lenders will usually look at your individual share of the profits. As with a sole trader, the exact figures used will depend on whether your income has been increasing or decreasing in recent years.
Understanding the basis on which your income will be determined can help you work out what to declare in your accounts to obtain the mortgage you need.
2. Get all your documents ready
Now that self-certification mortgages are no longer available, you’ll have to provide a range of documents to a lender to prove income and affordability.
Getting prepared can help you to avoid delays when it’s time to apply for your mortgage. Exactly what you need will depend on your business structure (see above) but you can expect to be asked for:
- Two or more years’ certified accounts, ideally prepared by a qualified, chartered accountant
- Your SA302 forms and tax year overviews (from HMRC) for the past two or three years
- Evidence of past and future contracts (if you’re a contractor)
- Evidence of dividends or retained profits (if you’re a limited company director)
If you only have accounts for one year, we may still be able to get you the mortgage that you need. Get in touch for advice.
As well as providing evidence of your income, you will also need to provide:
- Your passport or driving licence
- Two proofs of address, such as utility bills or your Council Tax bill
- Six months’ bank statements (for your personal and business accounts)
We use a system which automates much of this process, making it easy to supply all the information a lender needs.
3. Limit your outgoings and expenses
As well as considering your income, a mortgage lender will now look closely at your expenditure to ensure any new mortgage is affordable to you.
So, in the six months before you apply for a mortgage, it can pay to control your expenditure as best you can. This is an excellent opportunity for you to review your spending habits and to keep a positive balance in your current account.
It can also be a good idea to avoid transactions that lenders might immediately see as an issue. These include:
- Payments to payday loans
- Deposits to gambling or betting companies
- Regular use of your overdraft
- Returned or unpaid standing orders or direct debits
- High bank charges – for example, for being overdrawn.
Get in touch
As self-employed mortgage experts, we regularly work with business owners to find the right mortgage. If you work for yourself and you’re a first-time buyer, you want to move home, or you want a better deal on your mortgage, get in touch to find out how we can help.
We can also advise you if you’re thinking of buying an investment property or a second home. Email [email protected] or call 0131 339 2281 to find out how we can help.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy to Let (pure) and commercial mortgages are not regulated by the FCA.