Self-employed mortgages: three myths debunked
Obtaining a mortgage when you’re self-employed can be very difficult.
Self-certification loans – a type of mortgage aimed specifically at self employed people who had trouble proving their income to lenders – were effectively banned in 2014, making things even trickier for people who work for themselves.
But the reality is self-employment is growing. The number of people registered as self-employed in the UK soared from 3.3 million in 2001/02 to 4.6 million in 2013/14, according to the Office for National Statistics (ONS).
While getting a mortgage isn’t easy if you don’t fit high street lender credit score systems, it’s not impossible, especially if you run a tight ship.
There are plenty of myths surrounding self-employed mortgages. Here, Chris Hall of adviser firm Mortgage Guardian, tackles some of the most common misconceptions.
“I do not have three years’ accounts”
Lenders often once insisted that applicants have three years’ accounts to prove average profit but this has not been the case for several years now. While some lenders still require three years’ accounts, there are lenders who will accept just two years’ accounts with one high street lender who will lend at 95% LTV on just one year’s worth of accounts.
“It is harder to get a mortgage because I am a contractor”
Different lenders have different views on contractors. This is mainly because some contractors are on fixed short-term contracts while others are freelancers, consultants or professional contractors from industries such as IT, legal or healthcare. Certainly lenders will want to see the current contract to find out when the contract started and how long is left to run as well as find out how long your client has been in their current industry. Some lenders will be interested in how long they have been contracting and the likelihood of the contract being renewed.
Lenders may ask for different paperwork depending on whether you are a sole trader, director of a limited company, partner of a LLC, freelancer or contract worker. A good adviser who knows their craft will be able to identify what each various lender expects in terms of the paperwork needed before submitting an application. Once lending criteria has been met, self-employed people will usually benefit from the same rates as employed applicants on a like-for-like basis.
Affordability is often an issue with the self-employed who declare a low income for tax purposes which then conflicts with the need to show enough income on a mortgage application to support the size of the loan.
If a self-employed person is prepared to buy a property for investment purposes, then a buy-to-let mortgage could be a way forward with no minimum income requirements from some lenders.
“I have just turned 60 and although I have a 70% deposit for the home I want, I’m struggling to get a mortgage due to having a self-employed status since I retired last year. With no accounts yet, and no history of trading, nobody is allowed to lend me anything.”
A lot depends on circumstances, how much the self-employed income is and whether there is any pension income to consider. If the applicant can wait until the first year’s accounts are complete which may not be that long, then a mortgage can possibly be placed with a UK mainstream lender. If there is no time to wait and the applicant fits equity release criteria, then a lifetime mortgage could be suitable for a new property purchase as income is not a vital factor.
Bower Retirement had this to say: “The self-employed income is an addition and is not a factor with a lifetime mortgage, but of course the borrower needs to understand the risks, and a lot could depend on just how much self-employed income they are making. For example, if it’s a large amount then the customer may want to be in a position to pay off the mortgage earlier, in which case careful consideration of early repayment charges is vital. This is a case where advice would be needed but a lot would depend on their personal circumstances.”
Borrowers should think carefully before taking out a mortgage on their main home with a lender based in a different country. The FCA is unable to regulate this activity in the same way as UK mortgages and clients are unable to complain to the Financial Ombudsman Service should they be unhappy. An overseas lender only has to abide by the law of the country in which it is based in and they may not be obligated to offer advice, ensure the mortgage is affordable or be sympathetic if there is a difficulty making payments.
Find out more about getting a self-employed mortgage here.