Self Employed Mortgage

What is a self employed mortgage?

In addition to lending to people in PAYE positions, lenders also lend to people in self employed roles.

A self employed business could include any role, from taxi drivers, online influencers and everything in between.

You may be a sole trader, a limited company director or even a partnership / LLP.

Depending on what your legal setup of your business is, will determine how a lender underwrites your mortgage application.

For instance, if you are a sole trader or a partnership, lenders will usually use your net profits or your share of the net profits if you are a partnership.

Depending on the lender, they may take an average office income or use the latest years’ profits.

A lender that is lending to a limited company director will either use the director’s salary and dividends received over the latest financial year (or possibly two) or use a combination of director’s remuneration, plus their share of the net profits.

A mortgage broker would be able to get an idea of your full situation, including how your income is made up, and what your company finances look like.

From there, once they understand your objectives, they would source a lender accordingly.

Make sure that the mortgage adviser that you use is regulated by the Financial Conduct Authority.

Is it hard to get a mortgage being self employed?

Whether it is hard or not to get a mortgage as a self employed person, depends upon your own situation and finances.

It is not necessarily more difficult to get a mortgage agreed for a self employed applicant, as long as the financials of the business are strong and you are talking to the correct lenders.

Many lenders offer the same amounts of lending to self employed people as they would to employed people, if the numbers are the same.

The trouble is, self employed lending can be a bit more complicated than lending to an employee in a PAYE position.

If an employee person is on a straight salary of £50,000 per annum, this can make calculating a maximum loan more simple if outgoings alone.

If a self employed applicant had net profits of £49,500 in the latest year, and £44,500 the previous year, some lenders would use an average (£47,000) whereas some would be willing to call it £49,500, reflecting the latest year.

The important thing to know is which lenders to approach depending on your situation. This is where a mortgage adviser will be useful to you.

Other things that can make getting a mortgage more difficult for self employed people, is capital expenditures within the business that have been deducted from profit.

For instance, if an electrician had a good year with a profit of £50,000, but prior to the end of the financial year, purchased a new van at £20,000, with HMRC agreeing that this figure could be written off against tax, the profit has now reduced to £30,000. This would have a big impact on your borrowing potential.

If a lender was willing to offer five times income, this potential loan of £250,000 may now be £150,000.

Make sure that you talk to a mortgage broker giving them full details of your situation and company finances, so they can tell you your borrowing potential and look for a lender that is suitable for you.

How much can I borrow on a mortgage being self employed?

The amount that you can borrow as a self employed applicant will depend upon the figures from your business and how the lender underwrites the application.

Some lenders may be willing to offer up to 5 times income, or perhaps even more in certain situations.

This is often determined by the loan to value of the property and the level of income on the application.

Lenders underwrite self employed incomes in different ways. For instance, if you are a limited company director, many lenders will use a combination of your salary and dividends over the latest year, or perhaps an average of the latest two years.

There are also lenders that will use the amount you receive as a salary within a financial year, plus your share of the net profits for that same year (or an average of the last 2).

If you receive a salary of £10,000 from your company, and the net profit was £160,000 (and you own 50%), this would equate to an income of £90,000 with a lender that works in this way.

If you were to use 5 times income from the latest years’ accounts, this would mean a mortgage of £450,000.

There is of course a lot more to take into consideration, such as your level of deposit, your credit file, your total debts, your monthly payments for these commitments, and any dependants that you have.

As a result, any figures should just be used as a guide and you should look for an independent mortgage adviser with experience in helping self employed applicants.

If you want to find out more about your credit file, Check My File is a good resource as they offer a free trial and show data from Experian, Equifax and Transunion.

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

Lenders have their own requirements on how many years of accounts are needed for self employed applicants. However, the most common number is 2 years of trading.

These lenders will either use the latest years figures or an average of the profits over the last 2 years (often using the latest year if it is lower).

There are lenders that can consider self employed applicants with only 1 years of accounts.

In this situation, the lender may need more details about what you were doing for work before starting the business, to make sure that they’re comfortable that you have experience in the industry, with future profits expected.

The lender may even want a projection from your accountant for income expected in the current year.

Although lenders will not use projected income, it can help to substantiate the most recent set of accounts to give comfort that the income is sustainable.

Talk to your mortgage adviser about the available figure and what is expected in the future, so they can look for a suitable lender for you.

Can I get a mortgage if I’ve just become self employed?

For a lender to offer residential mortgage to an applicant, they need to see a certain amount of trading experience to get a clear idea of the applicant’s income.

For instance, if somebody started a limited company 3 months ago paying themselves £4,000 per month, hoping that a lender will consider them to be on an income of £48,000, this does not work.

A lender does need to see a track record of the business trading to verify that it is in a position to pay this income over a year.

Company trading figures can fluctuate so lenders need to protect themselves and the applicants by thoroughly underwriting income over a longer period.

It would usually be a requirement that residential mortgage lender would require at least one year of trading before considering using the income of a self employed applicant.

However, if you are self employed and looking to take a buy to let mortgage for an investment property, there are lenders that can consider applicants with new businesses.

Some buy to let lenders can even offer buy to let mortgages for applicants with no minimum income at all.

The lender would need an understanding of what your financial situation is to make sure that they are comfortable that you will be in a position to make your mortgage payments.

The value of the property and the rental income expected will play a large part in determining the maximum loan offered by a buy to let mortgage lender.

Can you get a mortgage with declining profits?

With most lenders, it is possible to get a residential mortgage even if your profits are declining.

In this case, the lender would usually use the latest years income if this is the lowest.

However, the lender needs to be comfortable that you will be in a position to continue paying your mortgage in the future.

As a result, they will often want full details about why profits have been on the downturn and what is expected in the future.

They would often request these from your accountant, who would need to hold an accountancy qualification such as ACA.

This could be for simple reasons, such as reinvestment back into equipment resulting in higher revenue in the future.

If the reason is due to lack of business, this would give lenders some concerns about sustainability of income going forward.

You should talk to a mortgage adviser about why your profits are declining and your full situation for them to give you the advice you need.

Do I have to have an accountant to get a mortgage if I am self employed?

If you are self employed, you would often have an accountant that prepares your figures.

However, if you are a sole trader, you may choose to prepare your own accounts and submit your own tax return.

If this is the case, lenders are usually happy as long as the figures are reflecting on your tax calculation (previously known as sa302) and your tax year overview statement.

If, however, figures need to be verified further, it may be a requirement of the lender that you consult a qualified accountant.

This is especially the case if projections of a business are required, as it needs to be clear that they have come from a qualified person.

Should I use a mortgage broker if I’m self employed?

It is recommended to find a qualified mortgage broker if you are self employed and looking for a mortgage.

The reason is, lenders all have their own criteria and underwrite the applications differently. You will want to be sure that you are approaching the right lender for your situation.

For instance, if you choose to keep your dividends low and retain your earnings within your limited company for a later date, there will be a large difference in maximum load capacity across the lenders.

In order to be able to borrow the amount that you need, you will want to start by approaching the correct lender that understands your income.

A skilled mortgage adviser will be able to get a full understanding of your situation and review your documents.

They can then look for a lender that they believe will be best suited for your situation.

Most mortgage brokers will offer a free consultation to give you an understanding of your options.

Conclusion

Self employed mortgages can be more complex mortgages than employees on PAYE.

This is because there is more to take into account when looking at an applicant’s business.

Lenders need to get a full understanding of past and current income, and what is expected going forwards.

Mortgages for self employed people are underwritten differently depending on the lender.

As a result, it is important to approach the correct lender for your situation, to avoid wasting time with lenders whose criteria does not match your situation.

You should look for a mortgage adviser with plenty of experience in arranging mortgages for self employed people.

They can take the time needed to understand your situation and recommend a lender accordingly.

If you would like I NEED ADVICE to match you with a regulated, experienced mortgage adviser, offering a free consultation, please complete the contact form.