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A myth-busting guide to self-employed mortgages
One of the biggest misconceptions about today’s mortgage market is that it’s extremely difficult for those who are self-employed to get a mortgage. There are around 4.8 million self-employed people in the UK, and many of them believe that their irregular income or lack of five years’ trading accounts means that they wouldn’t meet the stringent requirements of lenders. This however is not the case. In theory, self-employed borrowers have access to exactly the same mortgages as those who are employed and their chances of being accepted to borrow are just as high as everyone else’s.
You may have heard the term ‘self certification’, for some time this was a mortgage product specifically designed for the self-employed and it allowed them to self-certify how much they earned. This type of specialist mortgage was outlawed in 2014 after it was found that lenders and borrowers were abusing the system and unaffordable loans were being approved. This resulted in some lenders becoming nervous about offering loans to anyone that didn’t fall into the standard income profile. Nowadays though, as long as borrowers can prove their income and satisfy the new rules introduced by the Financial Conduct Authority, that includes a variety of checks aimed to establish general affordability of the proposed loan, there is no reason a borrower would be disadvantaged on the basis that they are self-employed.
How you set up your business has no real bearing on your chances of being approved for a mortgage, it only really affects what information you need to provide in order to prove your affordability. Here is what you will be expected to provide depending on the type of your business:
As a sole trader, you are self-employed, and legally, you are your business. Recording your accounts is pretty straightforward and you will keep all the profits. It’s the profits that the lender will look at when assessing your affordability. Sole traders will be required to submit a self assessment annually to HRMC who will then calculate your earnings and total tax due for the year. The lender will require to see this alongside a copy of your detailed accounts. It’s important to note that the lender will want to see the previous year’s also.
Unlike a sole trader, a limited company is its own legal identity, so as a shareholder your liability is separate from your personal affairs. Directors usually pay themselves a basic salary and dividend payments. It’s important to make sure that your lender takes both into consideration when assessing your affordability.
If you start a business with another person you may decided to set up a partnership. When mortgage lenders look at your income they will take into account each partners share of the profits so it’s important to have you accounts up to date and clearly state each partners profit share.
When applying for a mortgage you will need to prove your income. Most lenders will want to see a minimum of two years accounts or tax returns in order to be assessed for affordability. The more you have to show, the better your chances. Here is a check list of what you will need to have in place before applying:
A track record of regular work
A healthy deposit
It’s imperative to have the accounts put together by a chartered accountant so that you and the lender can be confident that they are absolutely correct. It’s not unusual for your lender to require a bit of narrative behind the accounts so we would advise to know the numbers inside out and be ready to give further explanation. For example, if there is a decrease in income at some point, perhaps down to buying new equipment you will need to explain this so that it can be taken into consideration.
When you are self-employed, there are a couple of hurdles you may come up against when proving your income. First of all, previously you and your accountant might have been keen to legally reduce your taxable income in order to pay less tax. This however could work against you because when the time comes to apply for a mortgage, you want to show the biggest income possible in order to be approved for the mortgage you want. Secondly, if you’re the director of a limited company, the profits of the business may stay in the business as opposed to being given to the individual as a salary.
If you don’t have two years worth of trading accounts, don’t throw the towel in just yet. There are some mortgage lenders out there will still consider your application if you can prove a record of regular work and have evidence of work lined up for the future. The key here would be to enlist the help of a mortgage advisor who will know the market inside out and can advise you on the best course of action for your application.
If you already have a mortgage and you simply want to remortgage to save money or if you are planning on moving house, it is best to speak to your current lender first. You have a background with them so are far more likely to lend to you than a lender who doesn’t have the same history with you.
When going through the process of applying for a mortgage it’s easy to get wrapped up in the end goal…getting approved, but it is important to remember how big a commitment a mortgage is, and one that shouldn’t be taken lightly. The consequences are high if you fail to keep up with the repayments that could end up with your home being repossessed. This is obviously a fate that the you and lender want to avoid so it is imperative that you are able to demonstrate that you earn enough to repay the mortgage and that you are in a secure enough position financially to meet the payments long term.
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