Self-Employed Mortgages

Is it hard to get a mortgage if you are self-employed?

It’s not hard, it’s just a lot more paperwork, unfortunately. More evidence is needed to understand how your business is structured, who else may be involved in the business,
how you’re looking to buy the property and what your earnings look like.

Depending on how you’re set up as a self-employed person, we will guide you as to what documents are required. We often work alongside your accountant, because you may not necessarily understand the terminology, the HMRC requirements and what lenders are looking for.

We keep you in the loop as to what documents we are requesting from your accountant. But it’s not any harder. There’s just more to organise.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?

The type of mortgage would be exactly the same as if you were employed. It’s still down to the type of borrowing you’re looking for and the type of property. All those conversations would be exactly the same as if you were employed.

In terms of getting a 95% mortgage – or a 5% deposit, whichever way you want to look at it –
absolutely, yes. If you hit the affordability and certain criteria from the lenders, there’s no reason why you can’t.

How many years do you have to be self-employed to get a mortgage?

Ideally, two years. When you’ve started your own business, the first year generally has a lot of setup costs. Your net profit may not be a true reflection in the first year. A second year just shows the trend in your business, which is what lenders want to look at.

They want to understand your business’ performance. Are you earning on a par with last year or have you grown your business? If you’ve got three years, that’s even better, but two is really the minimum.

Can I get a mortgage with only one year of self-employment?

Getting a mortgage with one year is really tough. As I’ve just explained, one year does not give the full story, just a snapshot.

For example, if you’ve been employed as an electrician and then you go self-employed, one year’s worth of accounts may be ok – because the lender can see you’ve continued in the same line of work. You’ve got your own client bank. But it’s still a question mark, so it’s better to aim for two.

My most recent years earnings were less than my average. Will this affect my mortgage application?

It will certainly impact it, as I’ve just described. Lenders want to understand what direction your business is going in. Are your earnings level or growing? If they’ve reduced, we need to understand why.

For example, if it’s because you’ve needed expensive equipment, that can be justified. Lenders can potentially see that from your last year’s accounts.

Perhaps you had to employ more staff because your business has grown, taking a hit on profit levels. If we have an average of three years, we can show that upward direction.

If your average is less, there’s nothing to show what’s going to happen the following year. So it’s definitely a more detailed conversation with your advisor to help us present it to the lenders – again, potentially working with your accountant.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage if I’m self-employed?

Don’t worry that it’s any different just because you’re self-employed. It’s exactly the same.
Your borrowing capacity is based on what you earn, your outgoings, dependents and how much deposit you have. All those factors will still remain exactly the same if you’re employed.

How much you can borrow will just depend on your income and all the other factors I’ve just mentioned. For everybody, it’s around four and a half times your income.

What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?

Deposit would be ideally 10%, again, whether you’re self-employed or not. You can look to apply for a 5% deposit, as well.

However, the lower your deposit, the higher the risk for a bank. Your income has to be pretty strong to show you can meet those mortgage payments, because that becomes the biggest worry to a lender when they’re assessing your affordability.

The more deposit you have, the better your chances. But it’s not all doom and gloom, as I say, because if you’ve got strong earnings but just not saved up that much for a deposit, you can do 5%.

And in terms of using the self employment grant, no. If that is for the purpose of your business, it would be reported to HMRC, so I would shy away from that.

What are self-certification mortgages and do they still exist?

I’ve not heard of that for a while. Way back in the 2000s there were allowances for lenders not to necessarily check your self-employed documents. So, if you’d only been trading for a year or less, you didn’t necessarily have to declare how much you were earning.

Some specialist lenders would allow self-certification mortgages. Basically, you would sign a document to say you can afford this mortgage, and the lender wouldn’t even check what you earn. I don’t think that would ever happen now going forward.

They don’t exist now. It’s something very historical and they’re not likely to come back.

How will I be assessed as a self-employed mortgage applicant?

Just know and understand your numbers. You don’t have to be accurate to the exact penny, but when we’re understanding your income, it would be nice to know what your net profits look like.

A lot of people don’t understand the difference between gross profit, net profit or turnover, and they give us the highest figures – but they don’t necessarily reflect what a lender would be using for affordability.

It’s good to have your self-assessments ready or for your accountant to help you explain what your numbers look like, at least for the last two years. You know what you pay yourself every month, but do you know what your bottom line figures are? If you understand those, it will really help make that journey a bit smoother.

Again, it depends on your company structure. You might be a limited company, as the only director or with others. You might have a partnership, in which case we need to understand who the partners are.

You might just be self-employed as a sole trader, which makes it a little bit easier. If you’ve got an accountant, they will help you with your self assessments. It’s what you actually submit, setting out all the earnings you’ve taken, your expenses, bottom line net profit, and how much tax you owe to HMRC.

They are really important documents to understand, along with what tax you owed and how much you’ve paid. Lenders check all of that, but we will help you organise exactly what’s needed.

Will IR35 affect my mortgage application?

It doesn’t affect your application, it just can be tricky. It’s typically focused on contractors, software engineers and project managers. It’s just the way that HMRC assesses how you’re being taxed.

We need to understand, for example, if you’ve got a contract with a company, how you got that contract and how you are paid. There are ‘umbrella companies’ that look after your contract, how long it’s for and your payroll. They are effectively paying your tax for you through the pay slips.

We also need to understand if you’re doing multiple contracts, because you may charge different day rates across these. We need to show you’re declaring all your income through an accountant via self-assessment. It’s a complex conversation to have, but will mean your advisor understands exactly how it all works.

How will a lender calculate my self-employed mortgage earnings?

Just know your numbers for the last two years at least. If you’ve been trading for that long, know what your net profits have been. That’s what you’ve earned after you’ve paid your costs and tax.

That will be split down if you are in partnership with another director, or if you’re a sole trader, it’s all your own earnings. Once we break down those numbers, we can work out your income from there.

How do I prove my income? What documents do I need to apply for a self-employed mortgage?

The main thing is the self-assessment tax return that you complete, whether you do that yourself or your accountant does it for you. The tax return and tax calculations break down all your costs from different various income sources, which tax band you come under and what is owed.

Lastly, we need your tax year overview which is a declaration or receipt from HMRC to show that you’ve paid your tax on time.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.