Video: self-employed mortgages
In recent years, it has become harder for self-employed homebuyers to get a mortgage.
Without a contract of employment or regular payslips, it can be tough to convince lenders that you're a safe bet. But don't despair – with a decent deposit, plenty of planning and some financial discipline, it is possible to get a mortgage.
Our short video explains the basics.
Self-employed mortgage borrowing
There's no such thing as a 'self-employed mortgage': you'll be applying for the same mortgage products as homebuyers who are employed by companies.
There used to be a specific mortgage product for self-employed buyers called a self-certification mortgage, but these were outlawed for being sold more widely than they were meant to be.
For self-employed applicants, mortgage lenders generally require at least two years of accounts signed off by a certified or chartered accountant. However, the more records you can provide, the better.
If you can show a consistent or increasing profit over a number of years, this will help your application, as lenders look at average profits over a period of time to assess your risk profile.
If your income varies dramatically from year to year, you might need to provide further evidence of future income, such as new clients or contracts, or be able to prove that you have a significant amount of savings.
Mortgages for self-employed borrowers: how to improve your chances
Getting a mortgage isn't a five-minute job; it's useful to prepare for an application well in advance of making one. You can improve your chances of getting it right the first time by following these tips.
Use an accountant
It's vital to employ a certified or chartered accountant to prepare your accounts. Indeed, some lenders won't consider applications from self-employed people who don't have up-to-date accounts signed off by an accountant.
It's worth bearing in mind, however, that, while it's common for accountants to legally minimise your declared income so that you pay less tax, this could have an adverse effect when you apply for a mortgage, as your accounts will show a smaller profit.
Complete three SA302 forms
SA302 forms provide annual tax calculations, and most lenders will ask for three (one for each of the last three years) when you apply for a mortgage. That said, some lenders will accept two.
If you've sent your self-assessment tax returns online, you can print off your SA302 calculations. If you filed your accounts by post, you'll need to contact HMRC and allow up to two weeks for your forms to arrive.
Find out more: Tax for the self-employed – check out our full guide
Save for a bigger deposit
As with any house purchase, the bigger the deposit you've got, the easier it is to secure a mortgage at a good rate. Most lenders require a deposit of at least 10-20%, and if you don't have a long history of accounts, you could need an even bigger deposit to convince a lender that you're a safe bet.
Get your finances in order
Before you apply for a mortgage, give your finances a spring clean.
First, boost your credit rating by paying off any debts as soon as they're due, closing dormant accounts, ensuring there are no incorrect entries on your credit report and getting on the electoral roll. You should also be careful about your spending habits in the year before you apply, as all regular outgoings will be taken into consideration by your lender.
Take professional mortgage advice
If you apply for a mortgage and the lender rejects you, it will be recorded on your credit file. This can damage your credit score and, in turn, make it less likely that you get accepted by the next lender you apply to.
A whole-of-market will be able to look at your personal situation and advise on the best lenders to apply to based on your credit history.
How you'll be assessed as a self-employed mortgage applicant
If you're self-employed, your situation will generally fall into one of the three categories below. This will affect how your lender assesses you.
If you're thinking of changing company type (for example, you're a sole trader thinking of registering as a limited company), it's sometimes worth waiting until after you've been accepted for a mortgage to do this, as company changes can have an adverse effect on your application. This will vary depending on your circumstances, though, so talk to a mortgage adviser if you're unsure.
If you're a one-man-band, you (or your accountant) will declare your income using self-assessment and have your tax calculated by HMRC. Once you've done this, you can ask for an SA302 form, which outlines your total income and tax paid. Lenders will then base their mortgage calculations on this information.
If you're in business with someone else, mortgage lenders will look at your individual share of the profits.
If you form a limited company, you'll be keeping your business accounts separate from your personal ones. As a director, you'll usually pay yourself a salary and dividend payments, both of which lenders will take into account when you apply for a mortgage.
If you choose to retain profits in the business rather than drawing them out, this can create difficulties, as some lenders don't factor retained profits into their calculations.