Over the duration of the past 25 years, a lot more people have become self-employed. This isn’t influenced by ‘get rich quick’ schemes, it is down to the fact that working patterns have simply changed. It is quite unlikely for a person to stay with their first Employer all the way through to retirement. People change jobs for reasons such as to improve their personal and financial situations. There are certain roles where self-employed and freelance roles have increased rapidly for example, Digital and Engineering departments. Given the increase in self-employment, it is only right that these individuals feel nervous when considering getting a mortgage because of the uncertainty of their income.
The good news is that lenders are aware of this and therefore it’s a lot easier for self-employed individuals to acquire a mortgage. Though self-employment would still very much be a specialist area in the mortgage industry. Below are some hints and tips in order to help a self-employed applicant get prepared if they are thinking of pursuing their ambition to buy a home.
A minimum for this is one year’s Accounts as it would seem that Specialist Lenders tend to work off a single year. Other High Street Lenders will want two years’ Accounts. With Lenders taking you on as Self-Employed, they want to make sure that you prove your track record.
The way most Lenders do this is by taking an average of your last 2 years’ worth of earnings. Though if your business is expanding then some Lenders will settle by working off the latest year without looking into what happened before.
Technically, you are technically an employee of your business but Lenders don’t necessarily assess you as unless you own less than 25% of the shares. Most Lenders would add the dividend you have drawn to your annual salary to calculate your annual earnings. The amount you’re eligible to borrow will be based around a multiple of this figure. There are various Lenders who instead work from net profit rather than salary/dividend. This works well for Directors who choose to keep their drawings low.
This is a common question and unfortunately this can be a problem. Whilst we understand that when you meet with your accountant, part of the conversation will consist of how to minimise your tax liability, the opposite applies with a mortgage. The more income you declare reflects on the bigger the mortgage you’re able to get.
The deposit is the same for self-employed as it is for employees. The minimum deposit is normally around 5%. However, if you only have one year’s Accounts then you may need to put down more.
There are mortgage options available for contractors. Seemingly more people work for short term contracts these days. If you can show a good track record, then it is more of an option for your Lenders to think about taking your ‘daily rate’ rather than your net profit. With Contractors it can be really beneficial, as Lenders will consider treating you as self-employed instead if that seems to work out better.
The Lender will further ask you how long remains on your current contract. They need to be instilled with the reassurance that the income will be ongoing to ensure you can afford your mortgage. Depending on your specific circumstances there is even a chance for you to get a mortgage if this is the first contract you’ve had.
Unfortunately, due to how ‘self-certification’ mortgages were treated in the past years, there is little prospect of them re-appearing anytime soon.
There is no risk of a doubt that getting a mortgage as a sole trader, partner or Company Director proves to be more complicated than it would be for a person in employment. There will always be Lenders who are bound to be more flexible in some circumstances than others so it makes sense to get a Mortgage Broker in York who will offer you a realistic expectation from the start.
Self-Employed mortgages can take some serious planning ahead of time. Sometimes if there doesn’t seem to be enough earned in the past then it opens up a prediction about how much they can borrow based on a projection for the following year. To be clear though, those Accounts would have to have been submitted to the Revenue prior to a mortgage application being submitted.