How to get a mortgage if you are "Self-Employed" or a "Limited Company Director"
Post the credit crunch and with all the new regulatory changes that followed, it has become a lot tougher for self-employed workers, freelancer's contractors and limited company directors to get a mortgage – but it's not impossible.
If you work for yourself, and are looking to remortgage or buy a new home, find out below how you can get the right mortgage for your circumstances.
Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.
- Myth Busting
- Finding a mortgage
- Credit History
- What you need to get a mortgage
- Re-mortgaging with the same lender
- How your business set-up affects your mortgage chances?
- Proving your income
- The Dos and Don'ts of Self-Employed Mortgages
Let's start with some "Myth Busting"
There's no such thing as a 'self-employed mortgage'. The mortgages deals are the same for employer and self-employed alike. The only difference is how you present and justify your income to a lender.
So yes, you can apply for a normal mortgage. You will just need to jump through a few more hoops to prove your income compared to someone who is employed. This is not as bad as it sounds, because a good broker will be able to remove most obstacles by working with you and your accountant to get the correct information to satisfy the lenders criteria.
Finding a Mortgage
A mortgage broker is invaluable when you are self-employed or a company director. They'll know which lenders are willing to lend to self-employed, what incomes they will consider, if any lenders will accept less than two years of accounts and, most importantly, who will offer you a competitive rate.
The past few years have seen it get more and more difficult for first-time buyers and existing homeowners to get a mortgage, but one group of home-buyers and remortgage clients have suffered more than most: the self-employed and company owners.
Before the credit crunch in 2007/2008, self-employed workers could apply for a "non-status", "self-certification" or "self-cert" mortgage. With these loans, borrowers didn't have to prove their income using bank statements, payslips or account; instead they simply told the mortgage lender what they earned. Applications were then often "fast-tracked" through with no checks being made.
Although self-cert and non-status mortgages were meant to be aimed at freelancers, contractors, business owners and people with several strands of income, unfortunately the loans were sold more widely. Abuse of this system led to self-cert and non-status mortgages being dubbed "ninja mortgages" or "liar loans" because people where exaggerating their income in order to secure a bigger mortgage.
As a result, fast-track, non-status and self-cert mortgages have been removed from the market with good reason. This however makes it more difficult, albeit not impossible to get a mortgage if you're self-employed. You just need to use a good broker who knows how to present an honest case to the lender in the correct way. If done and presented correctly it should be no different to being employed!
A squeaky clean credit record will also boost your chances of getting a mortgage, but this is not essential. Be mindful that a lender won't just credit check you, they will also do checks on your business by running a check on your business address. So make sure that credit report is in the best possible shape too, sort out any unpaid or late debts and check the report yourself to make sure there aren't any mistakes that could damage your chances of getting a mortgage.
If for some reason your credit profile is not 100% clean, don't fret just yet. There are many lenders out there who will still consider borrowers with a few historic credit issues. Historic CCJ's, Defaults, IVA's and even historic Bankrupts CAN still get a mortgage.
A good mortgage professional will first of all understand what these are, and secondly will likely know which lenders may be able to help clients with these past credit problems.
What You Need To Get a Mortgage
The key change for self-employed workers is being able to prove your income to the mortgage lender.
Most lenders will want to see at least two years' SA302's and at least 2 years trading accounts. The more accounts you can show the better, but some lenders will consider one years trading accounts or one years SA302's.
Be mindful that at time of application you will now need…
- At least one years completed trading accounts or one years SA302 (but most lenders will ask for at least 2 or 3 years' accounts)
- A copy of your SA302's from HMRC and your accompanying tax overviews, and/or certified accounts from a qualified accountant
- A healthy deposit or equity in your property
When lenders determine how much to lend to you, they generally base their calculations on your average profit over the past few years, a client's salary and dividends or a combination or the all three.
If you are a limited company, most lenders prefer borrowers to employ an accountant to prepare the accounts. Some lenders state the accountant must be certified or chartered – so bear this in mind when choosing one.
If you are a self-employed sole trader however, you can use other professionals like book keepers to do your accounts as the lenders will generally use the HMRC SA302's to quantify your income.
Make sure your accounts are up-to-date and in order before you apply – lenders won't accept out-of-date figures and generally only use figures that are dated within the last 18months.
If you are self-employed and don't have two years' accounts, don't panic. Some mortgage lenders will still consider your application but only if you have at least one years trading figures. They may also want some sort of track record of regular work in a similar industry (maybe you have left employment to work as a contractor in the same industry), and that you have evidence of work lined up for the future.
Re-mortgaging with the same lender?
In other cases, if you already have a mortgage and want to remortgage to save money, your existing lender may be able to help. They have a history with you, and know you meet your repayments so are far more likely to help than a lender who doesn't know you. Contact your local IFA, Independent Mortgage Broker or Local Whole of Market Mortgage Broker who can offer you guidance on product transfers or retention products.
As with any mortgage lending, the more equity you have in the property, the higher the chances of being accepted for a mortgage or re-mortgage.
How Your Business Set-up Affects Your Mortgage Chances?
When you set up your own business you have a choice of three main business structures to choose from. The one you or your accountant chooses will influence how lenders view your income.
As the name suggests, sole traders are one-man bands or very small companies. Keeping records and accounts should be fairly straightforward – and you get to keep all the profits. It's these net profits a lender will look at when assessing your income. If you do your tax by self-assessment and get HMRC to calculate it for you, you will get a form called a tax overview and an SA302. This shows the total income received and total tax due. Your lender will want to see these as part of any mortgage application, so keep these handy and up to date.
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner's share of the profit. So, make sure you have accounts that are up-to-date and that clearly show exactly how much of the business each person owns, and the money (net profit) you and the company have made.
Setting up a limited company means you keep your business separate from your personal affairs. A limited company will have at least one director and, in some cases, a company secretary. Directors normally pay themselves a basic salary plus dividend payments. They may also take profit shares. Lenders vary on what they use for Limited company director's income. Some will accept basic salary plus dividend payments, whilst others will use a share of net profits. In rare cases, they may consider salaries, dividend payments and shares of retained net profits. A good mortgage broker will be able to guide you on this.
Proving Your Income
In order to prove your income, you will need to be able to provide your lender with at least one year's accounts and your latest SA302.
Get these put together by a chartered or certified accountant if possible, especially if you are a limited company. Also, make sure you understand the figures and can talk the lender through them if asked. For example, if you have a dip in your income at a certain point, you must be able to explain what happened and why. If you can clearly explain variations it is a lot more impressive than if you get flustered when questioned, and therefore increases your chances of getting a mortgage.
There are a couple of common problems you may come up against when proving your income.
Firstly, you and your accountant will probably have been keen to legally reduce taxable income in order to pay less tax. However, this could count against you when applying for a mortgage as you now suddenly need to show the biggest income possible in order to justify a bigger mortgage.
Make sure you get advice from your accountant and a mortgage broker as long in advance as possible before applying for a mortgage. This alone can save you a lot of heart ache and prevent unwanted headaches!
Secondly if you're a director of a limited company, you might have profits that you choose to retain in the business, rather than take out as salary or dividends.
Some mortgage lenders consider retained profits when assessing an application, but some don't. In some situations, this can mean company directors find it more difficult to get a mortgage than their employees. A mortgage broker will be able to help you find a lender that will take retained profits into account.
If you are looking to borrow more than £1 000 000.00, ask your broker to look at mortgages offered by private banks such as Coutts, Adambank or Investec. Private banks can be more flexible about what they take into account when assessing income, for example they will include other assets and incomes.
It's a good idea to take advice from both your accountant and a mortgage broker before you apply for a mortgage.
The Dos and Don'ts of Self-Employed Mortgages
- Do. Keep up-to-date records and accounts – you will not be able to get a mortgage without these!
- Do. Hire a certified or chartered accountant to prepare your accounts and tax return if you are a limited company as most lenders will need signed accounts by an appropriately qualified accountant to support your application.
- Do. Speak to a mortgage broker about your options as soon as possible so they can help guide you.
- Don't. Minimise your income too much for tax purposes – it will affect your chances of getting a mortgage.
- Don't. Assume it's impossible to get a mortgage if you're self-employed – it's not.