Self employed mortgages will be something you're thinking of if you work for yourself or run a company. But given that most self-employed people will have experienced some fluctuations in income, and the amount of paperwork you need can be confusing, getting your first mortgage while working for yourself may feel daunting. Also, you might be worried that you may be discriminated against and that finding the best mortgage deal will be difficult.
Rest assured: a self employed mortgage is well within your reach – but you will need to ensure that all your records are neat and up-to-date and that you are ready to talk through your finances with a mortgage broker. Find out the details below.
Self employed mortgage: how difficult is it to get one?
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In theory, if you are self employed, you can get all the same mortgages as someone who is on a PAYE salary. You're not restricted to any specific type of mortgage, nor are there any specialised mortgages for the self employed. In practice, what often causes difficulties in getting a mortgage is a lack of a reliable track record of income, or vast fluctuations in income which the self employed person can't explain in a way that the mortgage lender will find satisfactory.
So, is it more difficult to get a mortgage if you are self-employed? The answer is: it can be. If you are planning on buying a home and you work for yourself, you will need to keep scrupulous records of all your finances for at least two years. Mortgage brokers and lenders prefer to see a clear, reliable record, so it's advisable to hire an account to keep your records.
'Self-employed' can mean different things, however, and the more complex your company structure, the more hoops there are to jump through in order to get a mortgage. Read more on specific requirements from different types of self employment below.
Getting a mortgage as a sole trader
Being a sole trader is by far the simplest self employed arrangement, and that, in turn, does make it easier to get a mortgage. In addition to the two years of accounts, you will need to obtain a form called the SA302 from HMRC, which states your earnings, profits, and tax due. It is now impossible to get a mortgage if you haven't paid all your tax, or if it looks like you're avoiding paying tax, so make sure everything is perfect in that department. Also, do bear in mind that HMRC can be slow to process and send out documents, so give a good few weeks for it to arrive.
Getting a mortgage if you own a limited company
If your business is registered as a limited company, and you are a director (or one of several directors), then the most likely case scenario is that you are paid a salary you've set for yourself as well as dividends from profits, while the rest of the profits are kept in the company account – these are called retained profits. Now, the challenge can be in finding a lender who will take into account both your salary and dividends, and the retained profits. Some lenders will do this, but not many. So, the best thing you can do to maximise your chances of getting a mortgage is raising your salary (if only temporarily) before applying. Most company directors tend to pay themselves lower salaries in order to be more tax efficient, but setting your salary too low may hamper your chances of a mortgage.
Getting a mortgage when self employed: our top tips
- Hire a chartered accountant and make sure your financial records are signed by them;
- Maintain a healthy credit score: never miss repayments; if you have a credit card, make sure you make more than the minimum repayments;
- Be prepared to discuss your earnings in detail and make sure you're able to explain any drops in income. The better idea you can give to your broker or lender of how your business works, the better your chances of securing the mortgage.
- Try to put together as much of a deposit as you can; as in all other mortgage application cases, the more of a deposit you have, the better mortgage rates you'll be able to access.
Remortgaging when self employed
Remortgaging when self-employed should not be a problem, unless your circumstances have changed drastically, e.g. your business was restructured in a major way, sold, or the nature of what you do as a trader/company has changed qualitatively, with as yet unclear results.
If everything has remained the same, however, with a steady level of income, you shouldn't have any reason to worry.
If you've become self-employed between buying your first home and applying for a mortgage for your second, you'll need to have the same records (i.e. two years of accounts) before you remortgage, just as you would when buying the first property. Some lenders will accept 12 months of records if your earnings are good.
Got your accounts in order and ready to take the plunge? Let mortgage specialists Habito make the search easier; use their online calculator below to get an idea of the best mortgage deal for you, then speak to an advisor for unbiased advice about taking out a mortgage, help seeking out the best deals, and answers to queries you may have. They can use their insider knowledge to negotiate the best deal based on your financial history and current status, too.