A guide to self-employed mortgages

By Furness Building Society

Securing a mortgage when self-employed

In recent years, the desire to change from working for someone else to becoming the captain of your own ship has increased. There are millions of self-employed workers in the UK*, across all manner of industry, and it’s a trend that’s growing.

There are clear benefits so it’s easy to see why. Greater flexibility, control over your own professional destiny plus the potential financial reward - these are all aspects that have seen many take the leap to become freelancers or business owners.

*Office for National Statistics

However, there are also some risks. You become reliant on yourself for your monthly or weekly income and in times of challenge, your earnings may not always be consistent. For this reason, being self-employed can make securing a mortgage more difficult.

At Furness, we pride ourselves on our flexible lending criteria and our commitment to making the process as painless as possible - to suit your personal or professional circumstances. This guide sets out some of the questions you may have about mortgages for the self-employed in order to set you off on the right foot.

 

 

Mortgages for the self-employed

What is a self-employed mortgage?

In truth, there is no such thing as a self-employed mortgage*. When you apply for a mortgage as a self-employed worker, you’ll be applying for the same mortgages as those who earn a living working for someone else.

What will prove different is the assessment process. If you’re self-employed, passing a lender’s affordability tests can prove more difficult and more complex. This is because there’s no employer to vouch for your income, which dictates your ability to repay the mortgage.

Self-cert mortgages (or self-certified, self-certification) used to enable those who were classed as self-employed to borrow money on a property without proof of income - but they’re a thing of the past.

The self-employed mortgage process was modified in 2014 and lenders will now demand other methods and financial documentation as proof of income so it’s important to ensure you know what to expect. There may be a few more hurdles to jump but if you’re prepared, there’s no need to let that put you off.

*Which

Can I get a mortgage loan being self-employed?

For most lenders, having a self-employed status boils down to whether you own more than 20-25% of a business from which you earn your main income.

Self-employed workers usually then fall into one of three categories: Sole trader, business partnership or limited company.

 

Getting a mortgage as a sole trader
If you’re a sole trader, you’ll be asked to declare your full income using a self assessment tax return through which you’ll have your tax calculated by HMRC. This is known as a SA302 form.

Lenders use this form to assess your eligibility for a mortgage.

 

Getting a mortgage when operating as a partnership
If you and a partner go into business together, lenders will simply assess your individual stake within the business in accordance with the business’ profits and your self assessment tax return as above.

 

Getting a mortgage when owning a limited company
If you own a limited company, you’re classed as both an owner and employee of your business. Directors of limited companies usually allocate themselves an annual salary and make dividend payments to themselves based on the profit generated.

Lenders will take into consideration both your salary and dividends when assessing your mortgage eligibility.

Can I get a mortgage with retained business profits?

Many entrepreneurs make the decision to retain profit generated within the business, rather than paying this out to themselves as shareholders through dividends.

Many lenders will not factor a business’ retained earnings into their mortgage calculations. This can make it harder for self-employed mortgage seekers who don’t wish to extract this income out of the business. Even though this is typically a sensible decision based on maintaining the financial stability of the business.

Fortunately there are specialist lenders like us here at Furness, that recognise just because an income hasn’t been drawn, doesn’t mean it hasn’t been generated. In this situation, lenders will work directly with you and your accountant in order to obtain financial evidence of business growth.

How to apply

What paperwork do I need for a self-employed mortgage?

Before you start the application process, take the time to dig out and collate the documentation you’ll likely be asked to show. For self-employed mortgages, this typically includes:

  • A full SA302 form from the previous 2 / 3 years (or a tax overview from HMRC).
  • Certified business accounts from the previous 2 years+.
  • Documentation for dividend payments and/or any retained profits within the business.
  • Documentation for any upcoming contracts, if applicable.

How many years of accounts do you need for a self-employed mortgage?

Almost all lenders will require self-employed workers to provide a minimum of two but more typically three years’ worth of evidence outlining their income. This is because proof is required that your income is stable enough year-to-year for you to be able to make the mortgage repayments.

What to expect

How much can I borrow with a self-employed mortgage?

As with any mortgage, the amount you can borrow will ultimately come down to the size of your deposit and your current income. A strong credit score will also see you on your way.

How can I boost my chances of getting a self-employed mortgage?

It’s no secret that self-employed mortgages are harder to secure and can cause you a great deal of frustration and time if you’ve not prepared accordingly. By following these simple steps at the outset, you’ll improve your chances of securing the home of your dreams to match your career of choice:

  • Get on the electoral roll.
  • Save as much money as you can for your deposit.
  • Try to avoid certain property types in your hunt for a home (such as flats above commercial premises or unusual buildings - lenders are often less likely to loan money on these).
  • Check your credit rating is stable and pay off any old debts.
  • Make a note of the paperwork you’ll need to pass the affordability criteria.

Next steps

Do you have any questions? Please get in touch with our mortgage team to discuss your plans or give us a call on 0800 220 568.