How to find the best self-employed mortgage.
Finding a great mortgage deal when you are self-employed can be difficult. Every mortgage lender has a unique way of assessing what is and is not acceptable and the paperwork can be frustrating. Mortgage Pirate break down the common obstacles to help you find the best self-employed mortgage possible.
Today we will be covering:
- Why mortgages are harder to secure when self-employed?
- What paperwork should I provide?
- Can I get a mortgage if I only have a single year of accounts?
- How do lenders assess my income?
- About business related credit commitments?
- Other restrictions to look out for when finding the best self-employed mortgage?
- Changes in business structure.
Why are mortgages harder to secure when self-employed?
Mortgage lenders assess many factors when working out the level of risk attached to a mortgage. The level of income, outgoings and credit related issues will all be considered by the lender along with many others. Too much risk and they may decide not to offer a mortgage at all. Some lenders only offer their best self-employed mortgage deals on a specific range separate from the rest of their products.
With an employed applicant the lender will ideally want to see a permanent contract in place and 3 payslips to evidence the income. However, with a self-employed applicant it gets a little trickier. Firstly, self-employed income will normally fluctuate each month. It can also come from many sources such as salary, dividends, net profits etc. It could also be highly seasonal not to mention volatile in leaner periods.
As a result, lenders will want to see evidence of income spanning a longer period. This way they can get a good feel for the expected level of earnings in the future. It’s all about making them feel comfortable with the risk as a mortgage is a long-term prospect.
What paperwork should I provide to get the best self-employed mortgage?
Generally speaking there will be more paperwork to provide if you are a self-employed applicant. Sometimes you will find that an underwriter at the lender will request ever more documentation as the application progresses. If this happens remain patient and keep sending them what they ask for. You will need:
Standard documentation:
- The last 2-3 years of full accounts.
If you a sole trader or complete your own tax return you should provide the last 2-3 years SA302 and the corresponding tax year overview forms.
If you are director of a limited company or in a limited partnership you will need to provide the last 2-3 years of finalised audited accounts. In some cases, a director may also need to provide an SA302 and tax year overview also. - 3-6 months of business bank statements.
- 3 months personal bank statements.
There will also be times where the lender requests additional evidence if they need it. These items could include:
- An accountants reference.
The lender will usually have their own reference template. The lender will email this to your accountant. This form confirms basic figures and if there are Coronavirus related bounce back loans etc that need to be accounted for. - Additional years accounts or more business bank statements.
- A profit projection from the accountant.
Lenders may request a projection if there has been a trend of large profit increases year-on-year or if the firm is close to the end of its accounting period. - Reason for any sharp downturns in profit.
Can I get a mortgage if I only have a single year of accounts?
Yes, you can.
A handful of lenders remain who can consider a mortgage based on a single year of accounts. Halifax are one of the largest lenders who can still consider this. Be sure to check if there will be any minimum deposit restrictions if using a single year of accounts. The lender will also want to check what you were doing before switching to self-employment as they will be looking for some sort of track record in a similar role.
You may be able to achieve a better mortgage deal overall by waiting until you have 2-3 years trading accounts. This is because more lenders will be available to choose from and they will offer a broader range of products.
How do lenders assess my income for the best self-employed mortgage?
Each lender will use your income evidence in a different way and the results can be hugely different from one lender to another.
If you are a sole trader this will be straight forward as the lenders will use your net profit figure. Some lenders will average the net profit over a period of 2-3 years, whereas others will use the latest figure if it is the highest and there has been a gradual increase each year.
In cases where there has been a drop in profit compared to a previous year the lenders are inclined to use the lowest figure for their affordability calculations unless there is a good reason for this.
Limited companies.
For applicants who are directors / partners of a limited company it gets a little more complicated.
As above, lenders will either average the income figures, use the highest year if the most recent, or focus only on the lowest year if there has been a drop in profit. However, they can use different combinations of income in their calculations.
For example, they could use:
- Earned salary.
- Salary plus dividends.
- Share of net profit before tax (share based on percentage of company owned)
- Salary plus share of net profit.
As you can see, choosing a lender who can squeeze as much income as possible from the accounts may help you purchase a higher value property. Keep an eye on the interest rates though.
Some applicants who have a shareholding in a limited company will not be classed as self-employed for mortgage purposes. Typically, a shareholding of 20-25% or less in a company will mean that the mortgage lender will apply their employed criteria when assessing income. In cases such as this they can consider the salary and potentially dividends. There will also be less paperwork to provide for the lender as payslips will be used.
What about business related credit commitments?
Business loans or credit agreements in the limited company name should not be considered as the cost of these will already be reflected in the accounts. If however, they are taken in a personal name, such as those for a sole trader, they do need to be accounted for on the affordability calculations. This is because the debts will remain active if the business were to cease trading and are the responsibility of the self-employed applicant.
Any Covid-19 related assistance will need to be declared. This includes Bounce Back Loans (BBL), Coronavirus Business Interruption Loans (CBIL) and Self-Employed Income Support Scheme (SEISS). Lenders will review the outgoings and in many cases may deduct them from the bottom line admissible income. Speak to your accountant about these to obtain any details for the lender.
Will there be any other restrictions to look out for when finding the best self-employed mortgage?
The coronavirus pandemic affected those who are self-employed disproportionately. As a result, businesses struggled to cope during this period despite help from the various support schemes on offer. Mortgage lenders effectively stopped taking new business from self-employed applicants temporarily. Thankfully this period quickly passed. However, the remaining legacy of this is that some lenders are still implementing a restricted service for those who are self-employed.
Lenders require a higher minimum deposit for potential purchases. Alternatively, a higher minimum level of equity is needed for them to consider a remortgage. This means that options for those who have a low deposit are more difficult to find or are prohibitively expensive. There is no way around this other than to source additional deposit if possible or find a lender able to assist. A whole of market mortgage broker is recommended in this case as they can search deals away from the main high street lenders.
Some lenders offer a specific product range only to self-employed applicants. These deals may be less attractive than their general range on offer. Be careful not to apply for a product that you do not qualify for as it could waste valuable time.
Change in business structure.
If you have recently changed your business model from sole trader to a limited company, you may find options are limited. This is because lenders find it difficult to average income between the two legal entities. Some will want to wait until you have 2-3 years in the new trading style before they can help. Others can help sooner but may want to see at least 1 year in the current style to compare with 2-3 in the previous setup.
Either way the more stability you can show to a lender the better. Timing is also important as some people decide to change the structure of the businesses shortly after completing their mortgage application. That way they hope to have at least 2 years or more before the next mortgage review is due. At this point they will have enough paperwork available to open up more options.
Summary.
The key thing to remember when trying to find the best first-time buyer mortgage is to make sure you have enough paperwork to back up your income. A single year accounts may get you a mortgage but there will be a lot of concessions to make. Mainly on the interest rate being charged, the lenders fee and number of products to choose from. I would always recommend waiting until you have at least 2 years of accounts before looking to apply as it will make the entire process cheaper and simpler.
Speak to your accountant and broker in advance of a property purchase so that they can formulate a plan to work towards.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
