Top tips for self-employed workers applying for a mortgage
In the nineteenth century, the Industrial Revolution dramatically altered the UK’s work landscape. Today, it’s the rise of self-employed workers. Over the last 15 years, this group has significantly grown, now making up nearly 16% of the UK workforce.
Increased emphasis on work/life balance, technology innovation and career opportunities has also led to a range of professions having more flexible methods of working. And in turn, many have ditched the conventional 9 till 5.
This diverse sector of contractors and freelancers is making a more significant contribution to the UK economy than ever before; they added an estimated £125bn to the UK economy last year. Moreover the self-employed are also prudent financial planners. Our research found that more than four in ten (42%) self-employed respondents said that they would be able to sustain themselves financially for six months or more if no new business came in, compared to just 32 days for the average employed UK worker.
Despite this some lenders haven’t caught up. Traditionally, mainstream lenders have been unwilling to lend to self-employed customers due to their complex or irregular sources of income.
Automated credit scoring incorrectly labels these individuals as ‘high risk’, leaving them with a simple ‘computer says no’ response. This can make applying for a mortgage feel like a daunting task if you’re self-employed; but it needn’t be.
Here is where mortgage brokers can lend a helping hand, steering self-employed workers in the direction of specialist lenders who manually underwrite on a case by case basis to assess affordability. A bit of homework and preparation before this step can significantly increase your chances of securing home ownership though.
Review monthly expenditure
Both personal and business expenditure will be examined when it comes to assessing affordability. It may seem obvious, but the first important step is to review your own personal finances, looking back at least three to six months before applying for a mortgage.
Review your current lifestyle choices and spending habits to determine whether some areas need changing. Could you cut down on takeaways and going out, freeze a gym membership, or temporarily cancel subscription services like Netflix or Amazon Prime? Could you also reduce, or pay off any outstanding credit commitments?
Individually, these may not seem like much of a difference, but when combined, you could see your savings trickle into the hundreds over those few months. A sensible attitude to spending will be duly seen in your monthly outgoings when it comes to bank statements being reviewed by a mortgage broker.
Mixing business with pleasure
Many of you who are self-employed choose to run your business as sole traders and may not have a separate business account. If this is the case, it’s even more important that your personal account is reviewed with a fine-tooth comb.
Monitor your cash flow and expenses on a regular basis and make sure that you will be able to provide a potential lender with detailed and thorough documentation to support your application.
Failing to prepare is preparing to fail
While a mortgage broker will help you understand the exact requirements of a lender prior to application, there is no harm in doing a bit of research a couple of months beforehand to see what type of documents will be needed. The selection of appropriate and clearly presented documents to support your application will be crucial.
For example, lenders usually need proof of ID, voters roll address and proof of income. At Kensington, this is at least twelve months’ worth of the latest finalised and agreed accounts, or an SA302 form supported by the most recent three full month’s bank statements. This means it needs to be a direct bank account where the individual’s salary is paid into, either personal or business. It’s also best to check if there is a minimum income or profession criteria. Getting an up-to-date credit report is also crucial.
For contractors, income is usually assessed on a day rate of between 46 to 48 weeks. This takes into consideration any contract voids such as holiday or illness. At Kensington, if a client is coming to the end of their current contract, we’d also look for information on their future intentions as well. Being conscious of this, can help you plan accordingly if there are any events which may need to be explained to your broker.
Lenders will normally have an outline criteria guide on their website. However, these are predominantly for intermediaries to use, so if there are any questions which arise from looking at these, they are best directed to your mortgage broker.
Specialist lenders focus on understanding an individual’s background and assessing each case on its own merits. That means we’ll accept a copy of a CV to give us a better understanding of a person’s work background and look at only 12 months’ worth of accounts for new business owners or those who have recently started limited companies. If you’re more experienced, we also take into consideration a company’s director’s sole share of net business profits and salary.
Get a helping hand
A rejection by one mainstream lender isn’t the be all and end all. Ultimately, specialist lenders can provide self-employed borrowers with a chance to step onto the property ladder, which other high-street lenders may not grant so fairly.
The majority of specialist lenders, however, can only be reached by speaking to a financial adviser. If you speak with a mortgage broker, they will be able to guide you through the thousands of products which aren’t available on the high street and secure a mortgage that should be best suited to your needs.
Craig McKinlay is new business director at Kensington Mortgages