Let’s look at the differences, and similarities, in getting a mortgage when you are self-employed.
Although it is true that it might not be as straightforward as applying when you’re PAYE, don’t worry, a full range of mortgage offers should still be available to you, and our team of mortgage experts at PIL Southampton has lots of experience in this area.
We are helping self-employed people to successfully secure mortgages every day, and we are here to help you too.
Here is some useful information that might help to answer some questions you may have been thinking about.
It’s not so much about it being harder to get a mortgage when you’re self-employed, it’s more a case of the application process being more complex, because you need to compile more financial paperwork to prove your financial status. This is a crucial step for you to assure potential mortgage lenders that you will be able to reliably meet your monthly repayments.
As long as you can tick this box and meet all their criteria, your options should be just the same as anyone else applying for a mortgage.
No, they shouldn’t have to pay higher rates of interest on any mortgage they apply for, because they are choosing from the same range of mortgage products as anyone else, which means that the rates they are offered will be the same too.
It is not the case that there is a specific range of mortgages available only to the self-employed, with their own rates and terms and conditions.
As with anyone applying for a mortgage, the interest rates you are offered will depend on factors such as the size of your deposit and your credit history.
Just like most other people applying for a mortgage, a lender will probably be happy to lend you around 4.5 times your annual income. This, of course, depends on your personal circumstances.
In terms of how your income will be calculated, lenders will generally look at a sole trader’s net profit over the past two or three years, using the average figure from those years.
If you have just had a particularly strong financial year, it may be advantageous to apply to a lender who only wants to see that one year of most recent accounts, instead of taking an average over the past few years.
When they are looking at a contractor’s mortgage application, lenders will look at their average income over the past few years but it’s worth noting that, if your earnings have been quite volatile, a lender may take your lowest earning year as a reference for what you can afford to borrow.
Alternatively, some lenders may agree to use your day rate to calculate an annual sum.
If you have a limited company, a lender will review your personal share of the company’s net profit, or your salary and dividends.
They’re not different at all – self-employed mortgages don’t exist. It’s just the application process that changes, as you have to provide different financial documentation and proof of income.
Generally speaking, you will be considered self-employed if the main source of your income comes from a business that you own at least a 20 per cent share in.
Company-status wise, you could be a sole trader, a director or a partner, or you could have set up a limited company as a contractor and may work for one client for a particular period of time.
You might be a freelancer, hired by a variety of companies that you do jobs for. Or, you could be an independent business owner, responsible for the day-to-day running of your business.
Whichever way you are doing business, lenders will usually want to see that you have been trading in this self-employed status for at least two years, with evidence of income to prove it.
You can indeed. Just as both of you would verify your financial stability and proof of income if you were both employed, or applying for a sole mortgage for that matter, so both of you will have your individual circumstances verified.
In this case, one of you would go through the ‘PAYE process’ and one of you would go through the ‘self-employed process’ regarding the paperwork you would be required to provide in order to prove your earnings and outgoings.
As with any joint mortgage, both your names will be on all the mortgage documentation, you will both be responsible for keeping up all the repayments – including ‘each other’s if necessary, and both your incomes will be taken into consideration when the lender is assessing your buying power.
Just as you would if you were not self-employed, you have to provide all the usual documentation like a passport or driving licence for proof of identity, recent utilities for proof of address, bank statements for the previous few months and evidence of the source of your deposit.
Regarding the financial documentation, as they are not employed and cannot therefore provide payslips, self-employed applicants are likely to be asked to provide the following paperwork to prove their income:
Also, depending on the type of self-employed status you have:
If you are operating as a small business, your lender may ask you to provide information regarding your operating costs, office and equipment rental costs, insurance, credit cards and loans and/or vehicle leases.
To maximise your chances of getting the most appropriate mortgage for your current needs and circumstances, you will want to make sure your credit rating is as good as it can be, check there are no errors or anomalies on your credit report, avoid major purchases, save as much as you can for the biggest deposit you can manage, and speak to an experienced mortgage broker.
You will also want to make sure that your accounts have been prepared by an accountant, as these will hold more weight. Be careful, though, as accountants can often prepare accounts to be most advantageous for tax purposes, which may not present the strongest picture from an income perspective. This could have a negative impact on the amount you can borrow.
We will take the time to get to know you and your specific circumstances. Then, we will use this information, combined with our experience and knowledge of the options available in the mortgage market, to find the most flexible and competitive mortgage deals that are currently available to suit your particular circumstances.
Our first priority is to keep your best interests, and the best outcome, at the heart of everything we do for you.
We are also mindful that applying for a mortgage can be a stressful process, so we keep you up to date and make sure everything runs as smoothly as possible.
Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407.