There are many myths surrounding getting a mortgage as a self-employed individual and many presume that they will struggle to get a mortgage because of their irregular income. The amount you can borrow and the way it’s calculated depends on the lender, your legal status (sole trader, limited company director or partnership) and your previous years’ accounts. Keep reading to find out everything you need to know about getting a mortgage as a self-employed worker.
Is it difficult to get a mortgage if you are self-employed?
There are around 4.8 million self-employed professionals in the UK and many believe they will struggle to get a mortgage because of their irregular income or lack of three years’ worth of accounts.
When you apply for a mortgage, you need to be able to prove how much you earn because lenders want to be sure you are able to afford the monthly payments. If you’re self-employed, proving your income is more difficult than if you were in permanent employment. However, if you have the right paperwork in place to prove your earnings and ability to sustain that level of income, you should find loans at little extra cost.
Consider a contractor mortgage specialist
Specialist contractor mortgage lenders are familiar with contractors and the different ways they can get paid. They will have special processes in place which can accurately determine a contractors’ eligibility for a mortgage. They work closely with mortgage providers and lenders to get a mortgage that’s tailored to your needs and lifestyle.
Speak to a broker
It is always best to speak to a broker who can advise you on the most suitable lender and your options. They will sit down with you and discuss your personal circumstances. Once they have a good understanding of your circumstances, they’ll be able to offer further advice.
Proving your income
Lenders will want to see the income you have reported to HMRC and the amount of tax you have paid. As a general rule of thumb, the longer you have been self-employed, the wider choice of lenders and borrowing options will be available. The longer you have been trading, the more proof of income you have – so lenders can decide whether or not you’ll be able to make the monthly mortgage payments.
Your business structure is an important factor which is taken into consideration by lenders when you are applying for a mortgage. Sole traders can be assessed in two ways. Lenders will take the average income from the past two or three years of business is your income has increased. If it has decreased lenders may use the latest or lowest figures.
For limited company directors’, lenders will look at your income based on salary and dividends. Sometimes they will also assess the director’s salary as well as retained profit in the company.
For partnerships, lenders are likely to take the net profit as income to calculate your mortgage.
Is it worthwhile using a dedicated contractor accountant?
One of the benefits of being a self-employed contractor working through your own limited company is that you can dictate what you can draw as salary and dividends. It is worthwhile using a dedicated contractor accountant if you are a director of your own limited company because they provide tailored tax planning advice. If you let your accountant know how much you want to borrow from a lender, they can advise you on the best payment structure within the company to reflect this. For example, you could increase the amount of salary you pay yourself and decrease the dividends in order to strengthen your chances of having your mortgage application accepted.
It is also worth noting that contractor accountants (such as Churchill Knight) can provide new directors with projections of earnings, all they will need from you is the contract. Lenders will use the projections to determine what mortgage sum the individual should be granted and whether they will be able to meet the monthly repayments.
Consider your earnings and what you can afford
Be realistic about what you can and cannot afford. It is worth considering the financial obligations of your business, as well as personal financial matters. Do you have any holidays planned which may mean you are unable to make the monthly mortgage repayment? Will you still be able to make the monthly repayments if you have an extended period with no work due to illness?
How to apply for a self-employed mortgage
Lenders could ask for the following things if you are self-employed and applying for a mortgage.
- At least six months’ worth of payslips are required if you are an umbrella or CIS employee.
- Personal Tax returns – lenders want to see evidence of all the income you have reported to HMRC and the amount of tax you have paid. To prove this, you will need an SA302 form and a tax year overview.
- Any insurance or protection – lenders often like to see evidence of any Life Insurance or any other cover you may have which may cover the mortgage.
- You will need (ideally) two years’ worth of signed company accounts if you are a director of your own limited company. If you do not have this do not worry! Your mortgage broker can advise you on the best course of action!
- Bank statements (both the one you get your salary paid into and business bank accounts for limited company directors).
- As a contractor, it is advised to have evidence of fully signed contracts to show how often you take on assignments and your day rate.
- Some lenders may require at least two years’ worth of P60s.
How to improve your chances of being accepted
To stand the best chance of having a mortgage approved you should follow the steps below:
- Check your credit score – the better your credit score the more likely you are to get a competitive mortgage. Check there aren’t any adverse entries against you as this could negatively impact your chances.
- Make sure you are on the electoral roll – this helps with your credit score.
- Have a healthy deposit to put down – having a larger deposit than required will strengthen your position in the eyes of the lenders as you will be considered less of a financial risk.
- Have all your accounts in order – always keep your business paperwork, accounts and electronic records up to date and ensure everything is paid on time. It is recommended that you use an accountant, as many lenders will insist that accounts are prepared by a chartered or certified accountant.
- Take steps to improve your credit score – if you reach your credit card limit regularly this can negatively impact your credit rating.
Churchill Knight can help you get your finances in order
As a specialist contractor accountant, we can advise you on the best way to manage your finances and legally maximise your take home pay. Our expert accountants can offer you tailored business support and advice and reduce the amount of time you spend on administration by handling the paperwork for you – leaving you with more time to focus on your contract work and plan for the future. We will also ensure that all your business accounts are up-to-date in preparation for your mortgage application.
If you would like any further information about our accountancy packages our expert consultants would be happy to go through our services with you. Contact us today on 01707 871622 or request a callback.