Mortgage Advice For The Self-Employed
What is a Self-Employed mortgage?
Currently, there are no mortgage products on the market that are specifically aimed at Self-Employed people. You will, however, have access to the majority of mortgage products that are available, although you’ll need to undergo a slightly different application process.
You will ordinarily have to meet additional acceptance criteria, such as having traded for a minimum of three years. For most lenders, you will need to supply evidence of at least two years worth of certified accounts.
How will your Self-Employed application be assessed?
As with employed borrowers, lenders assess your application in terms of your affordability and strength of credit score.
The difference lies in how they determine what you can afford and how you prove your income. Self-Employed workers can often experience fluctuating income, making a standard yearly income difficult to establish. The type of Self-Employed business you operate can also impact the assessment criteria, as per the below:
For sole traders, your loan will be calculated using your total net income. They will need a copy of your SA302 form and tax returns for relevant years in order to establish this figure.
As a partner, you need to own at least a 25% share of the business in order to be classed as Self-Employed for the purposes of the application. Lenders calculate your affordability using your share of the net profits of the business.
For those operating as a limited company, lenders will usually only consider your personal income (salary and dividends) when calculating the loan amount. If you’re a company director, however, some lenders may consider the business’ net profits in addition to this.
How much can you borrow?
This will vary between lenders and be based on your affordability, as determined by each individual lender, as described above. A mortgage calculator may give you an idea of what you can afford, however, a multiple of three to five times your average annual income can be expected.
Your credit score will also have an effect on your loan amount, with those that have higher credit ratings more likely to achieve a loan at a multiple closer to five times their income.
How much deposit will you need?
Whilst lenders tend to be more cautious when lending to Self-Employed applicants, there is no particular level of deposit you need to meet. The standard deposit for all buyers is 10-20%.
Offering the highest deposit amount you can afford, however, will improve your chances of acceptance, as well as giving you access to more competitive deals. Mortgage rates typical decrease in steps when you offer 10%, 25% and 40%.
How do you improve your chances of being accepted by a lender?
Whilst offering a higher deposit improves your chance, it’s not an option available to all. There are, however, some additional steps you can take to improve the chance that your application is accepted:
Increase your income
As a business owner, you may prioritise retaining your business profits, however, if you pay yourself a higher amount of dividends in the twelve months or so prior to your application, your bank statements will look much healthier.
As well as increasing your chance of acceptance and the amount that you can borrow, this could also help you to save for a higher deposit.
Delay major business changes
Lenders are already cautious around Self-Employed borrowing and are looking for maximum stability. A business restructure or change of business type prior to your application could be a red flag to lenders that your business lacks stability.
Financial preparation prior to your mortgage application is advisable for all applicants but is particularly beneficial if you’re Self-Employed. All lenders will require that your accounts are signed off by an accountant for the purposes of proof of income, so preparing for this in advance will give the impression of financial responsibility.
Looking after your credit rating through careful credit card spending and prompt repayment can also help instill this impression.
How can a Mortgage Broker help?
Applying for a mortgage through a Mortgage Broker with specialist experience in helping Self-Employed mortgage applicants, usually improves your chances of obtaining a mortgage offer. As well as being able to predict any potential acceptance issues you may have, they can be sure to recommend those mortgage lenders who are more sympathetic to Self-Employed applicants.
Brokers can provide access to a broader spectrum of mortgage deals, so have the potential to save you money, as well as administrative support and advice throughout the process.