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21 May 2019

Nine self-employed mortgage myths busted

Most self-employed home-buyers think they will struggle to get mortgages, but is this really true?

Almost three quarters of self-employed borrowers fear it will be harder to get a mortgage because of their employment status, according to new research.

Online mortgage broker Trussle found that 1,421 out of 2,000 self-employed borrowers believe working independently could harm their chances of getting a mortgage.

However, the reality is very different.Here, Which? Mortgage Advisers' David Blake, an expert in helping self-employed buyers get mortgages, helps to address some of the many myths that abound in this area.

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1. You'll struggle to get a self-employed mortgage

For starters there is no such thing as a 'self-employed mortgage' - you'll be applying for the same mortgage products as homebuyers who are employed.

But whatever you call it, there is certainly a belief that it's tougher for people who work for themselves.

This is probably because, around a decade ago, self-employed mortgage applicants would use 'self-certification', which meant they could borrow without needing to prove their income - and this was outlawed by the Financial Conduct Authority in 2011.

The end of self-certification made it much tougher for self-employed people to get mortgages, but the growing self-employed workforce - currently 4.85 million, set to rise to 5.5 million by 2022 according to Trussle - means lenders are having to become much more open to self-employed buyers.

This means that the mortgage options for self-employed people have grown considerably in recent years.

David Blake says: 'Over the past 12 months lenders have looked to be more innovative and flexible in the way they deal with people who are earning on a self-employed basis.

'Being self-employed is a growing trend, so lenders are beginning to understand it better and see it as less of a risk.'

2. Self-employed mortgage applicants need to show at least two years of accounts

It's true that most lenders will want at least two years of accounts from self-employed applicants, but some will accept just one year's worth.

We analysed data from Moneyfacts to check which lenders would consider self-employed applicants and their main criteria for lending (see the table below).

We found at least 76 lenders - including major players such as Barclays, HSBC, Santander and TSB - that would consider a self-employed applicant.

Of these, 13 would accept self-employed workers with just 12 months of accounts. (Lenders not in the table didn't have a particular policy around self-employed people.)

In fact, according to David, it's not even necessarily the end of the road if you don't have a finalised single year of accounts.

'Some lenders work on a case-by-case basis and will consider applicants who present a low risk,' he says.

'This could be someone with bags of experience within their industry who's decided to go self-employed because it is more lucrative.

'If they have a substantial deposit and can show draft ufb01gures from an accountant, it's possible this type of applicant could be acceptable to some lenders.'

3. You'll need a deposit of at least 10% as a self-employed buyer

Most lenders are willing to offer 95% mortgages to buyers with a 5% deposit, regardless of whether you're self-employed or work for a company.

As with any house purchase, however, if you have a bigger deposit it will be easier to secure a mortgage at a better rate.

4. You won't get as good a deal as a company employee would

David Blake told us that as long as you (as a self-employed person) can provide proof of your income to satisfy your lender, there's no reason why you shouldn't qualify for the same deals as employed applicants.

5. Self-employed buyers can't borrow as much money

Most lenders will offer the same amount to self-employed workers as employed ones, according to David Blake.

This tends to be between three and five times your annual income.

However, if you're a sole trader and you tend to keep your net profit low in order to pay less tax, this could be a sticking point. In order to borrow more from a mortgage lender your net profit needs to be as 'high as possible', according to David.

6. You can always find the best mortgages on comparison sites

Comparison sites don't always list every available deal, meaning there may sometimes be better mortgage products out there than what you see on a comparison site.

For this reason, it's well worth using a whole-of-market broker who can assess every single mortgage on the market to find you the best one.

David said: 'When choosing a mortgage broker, ask whether they are independent or tied to a specified panel of lenders.

'Also, ask if they will tell you about mortgages that you can only get by applying directly (without the broker's help), and how their fees and commission work.'

7. Lenders won't take a limited company's profits into account

If you've chosen to set yourself up as a limited company in order to keep your business and personal finances separate, lenders will generally ask to see either your share of net profits after corporation tax has been deducted plus your salary, or your salary and dividends.

David told us that limited company applicants who have a low profit for a specific reason (such as investing in products) but an acceptable level of salary and dividends should not be treated differently. Nor should someone with a significant profit but a low salary and dividends.

It's common for limited company applicants to have a significant profit but low salary for tax purposes.

8. Lenders will look at your business partner's personal finances

If you're in a partnership, Which? Mortgage Advisers' David Blake said that lenders will generally look to see the 'strength of the business', including its future profits and what your share of those would be.

However, he said this should not be a hindrance and that self-employed applicants such as doctors, barristers and dentists who've just started a partnership should have no issues.

He said lenders would not look at your business partner's personal finances.

David added: 'Lenders will want to look at the business as a whole. They want to see how the business is performing so they can make a judgement call, a risk analysis, on the sustainability of the applicant's income moving forward.'

9. Lenders won't take a contractor's day rate into consideration

Increasing numbers of lenders are considering applicants who get paid a day rate rather than an annual salary. This is because more and more people are freelancing and earning in this way, especially in professions such as IT.

When we spoke to David Blake, he singled out providers such as Halifax and Nationwide, which he said have very flexible criteria when it comes to contract workers.

People who have significant experience in their industry and have started freelance work paid at a daily rate are more likely to be accepted by lenders than a self-employed person just starting their career, according to David.

The self-employed mortgage beliefs which are actually true

As you've seen from the myths we've busted, for the most part self-employed mortgage applicants are treated in a similar way to those who are employed by companies. However, there are a few things you do need to be mindful of.

You'll need to submit several tax forms

SA302 forms provide annual tax calculations, and most (although not all - see myth 2) lenders will ask for three (one for each of the last three years) when you apply for a mortgage.

It's worth noting that they will want to see paperwork for the most recent tax year, so you may need to submit your form well before the official deadline.

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.

You must have your finances in order

You should certainly aim to have your finances in the best possible condition. Make sure you pay off any debts, ensure there are no incorrect details on your credit files and get on the electoral roll.

Also consider your spending habits, as regular outgoings will be taken into consideration by your lender.

Bear in mind that lenders will look at your business bank statements, as well as your personal ones.

You may need an accountant

If you've set up a limited company, you will almost definitely need a certified or chartered accountant to prepare your accounts.

In fact, some lenders won't even consider applications from self-employed people who are operating as limited companies but don't have up-to-date accounts signed off by an accountant.

You don't need to do this if you're a sole trader, however.

Seek expert mortgage advice

A whole-of-market broker will have detailed knowledge of the lenders who are most sympathetic to self-employed mortgage applicants. They should be able to advise you on the lender most likely to say yes, as well as who will offer the best deal for your circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.