What is a Self-employed mortgage?

There isn’t a specific product called a self-employed mortgage. You will be applying for the same mortgage as anyone else. The difference is, you’ll have to provide more evidence you have a reliable income when you’re self-employed

Getting a mortgage when you are self-employed can be challenging but it certainly isn’t impossible. Don’t assume you are going to be rejected simply because of your employment status.

Who counts as Self-employed?

According to most lenders, If you own more than a 25% share in your business, then you are deemed to be a decision-maker. So therefore you are self-employed even if you get paid a salary. You are treated as self-employed and people often don’t think they are going to be because they are on a PYAE style system.

The type of applicant you are will affect how lenders determine what you can afford.

• Contractors: most lenders analyse the contract value or your day rate. Lenders can still make you an offer if you have gaps between contracts, but the fewer and shorter gaps you have the more lenders you will have to choose from. Contractors can be treated as self-employed or PAYE depending on their pay structure.
• Sole trader: lenders will analyse income based on your declared taxable income, this is based on your tax calculator and tax year overview.
• Employed/freelancers: Some lenders will consider any extra cash you earn as a freelancer or from a part-time job when deciding how much to lend. You must back this up with evidence and it’ll depend on the lender’s policy. You'll need evidence that you have 2 years of experience. But some lenders may accept 1 year’s worth.
• Mortgages for company directors: For limited company directors, lenders will look at either salary and dividends or salary and net profit. Some lenders will consider your share of the company profits.What Do You need to get a Self-Employed Mortgage?

There are plenty of things that you can do to make yourself look more attractive to lenders. Here’s what we would suggest if you’re planning to make that first step onto the property ladder.

• Employ a chartered or certified accountant. Most lenders will insist that your accounts are prepared by an accountant.
• Avoid spending on “red flags”. Things like online gambling websites and payday loan companies are big red flags for most lenders. Steer clear of these.
• Enlist the help of a mortgage broker. This is one of the best things you can do when you are self-employed and looking for a mortgage. A broker will be able to point you in the direction of the lenders that are most likely to give you a good rate, saving you a lot of time and money.

Is it an advantage or disadvantage to being self-employed when it comes to a buy-to-let mortgage?

Most lenders require a minimum income. So you need to prove that you’ve got a net profit above £25,000. Some lenders actually underwrite the income that you generate rather than the rental income that you achieve.

Every case is on its own merit. But again, don’t feel that because you’re self-employed, you can’t get a buy-to-let mortgage. That’s definitely not the case at all. There are over 160 lenders out there all wanting to lend money and they’ve all got their own little niches. Our job is just to find the right niche at the best rate for you.

What about joint applications – where one person is self-employed and one is not?

When you are employed, you work off your gross income. When you’re self-employed, most lenders work off the net income. So you have the tax deducted before, which seems quite unfair, but it is just the way the market always has been.

It wouldn’t impact a person getting a self-employed mortgage and an employed mortgage. You are still on the same route each underwritten by mortgage lenders on its own merit and accordingly to each employment contract you’ve got to the one person that’s employed would get the gross income of whatever they pay down the person, the self-employed would get the net income of whatever their tax return.

How much can you borrow if you're self-employed?

When lenders are working out how much you can afford to borrow, they will review your income. They’ll either base it on:

• your average if looking at 2 or 3 years of your income
• the largest amount on your most recent year of trading

If you meet the lender’s criteria, you can often borrow 4.5 to 5 times your total yearly income depending on your financial situation. This is how much you earned before tax but after any expenses.

The amount you can borrow depends on the size of the deposit, your credit history, income and outgoings.

What are the mortgage rates for self-employed people?

As long as you can prove a stable income and good credit history, you should qualify for the same mortgage deals as someone with a salary or hourly paid job.

But, if you struggle to get a mortgage with a high street lender, there are specialist lenders that may be able to help. Keep in mind that these may come with higher interest rates. To find the best mortgage rates for self-employed people you are better off shopping around or speaking to a mortgage specialist or broker.

Can I get a mortgage with just one year’s accounts?

Although one year’s accounts does place a restriction on the number of lenders there are still options. For example: If you are a hairdresser being employed in that role for 10 years and then you decide to go on your own, you will have a fair bit of experience. If however, you were a hairdresser looking to set up as a gardener? Lenders are looking for consistency and continuity.

The other thing is, people very often don’t realise they were self-employed previously. So, for example, like a contractor might have been contracting for a number of years and then set up his own company. In the eyes of some lenders, they actually treat them as self-employed anyway when they’re contractors. So don’t let the fact that you’ve only got 12 months’ worth of books put you off.

Does the multiple of your income differ from lender to lender?

Some lenders actually cup self-employed people to no more than four times their income because they worry about the fluctuation. The underwriters sometimes ask to see the business bank account. There’s no real reason for them to because they can see the income that’s being taken out of the business. They can see the tax returns, they can see the full accounts. However, they still wanted to make sure that the business was still in a good trading position.

What If you cannot get a self-employed mortgage from your high-street lender?

If you cannot get a mortgage from high street lenders, you can still get it from a specialist lender. These are lenders that specialise in providing mortgages to self-employed buyers. A specialist lender could be useful if you:

• have fewer than 2 years’ worth of accounts as self-employed
• are looking to borrow based on only your most recent year of trading
• are looking to borrow based on retained profits
• have declining profits
• have a poor credit history

Finding a specialist lender could be harder, as they are often only available when you apply through a mortgage broker.