Over the past 25 years more and more people have gone self employed. These people are not into “get rich quick” schemes, instead of working patterns have simply changed.
It’s very unlikely now that you would stay working for your first Employer all the way through to retirement. People change jobs to improve their personal and financial situations.
Sectors such as Digital and Engineering for example give rise to self employed and freelance roles. It’s natural that people in this position without a guaranteed basic income feel nervous about whether they can get a mortgage.
The good news is Lenders are waking up to this new world. It’s far from impossible to get a mortgage if you are self employed now.
However, it’s fair to say that this specialist area. Below I will give you some hints and tips to help you get prepared if you are in this position and thinking of buying a home or planning on moving home.
As a minimum you will need one year’s Accounts to get a mortgage. It tends to be self employed specialist Lenders that will work off a single year. Most High Street Lenders will want two years’ Accounts.
The statistics sadly suggest that most new ventures end up not being successful and therefore Lenders need you to prove a track record.
Most Lenders take the average of your last 2 years’ worth of earnings. However, if your business is growing there are Lenders that will work off the latest year and ignore what happened before.
Even though you are technically an employee of your business, Lenders do not assess you as such 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 can borrow will be based on a multiple of this figure.
There is the odd Lender who work from net profit rather than salary/dividend. This works well for Directors who keep their drawings low.
We get asked this a lot! Unfortunately, you can’t have your cake and eat it. We understand that when you have your annual meeting with your Accountant, part of this conversation is around how to minimise your tax liability.
The opposite applies when it comes to taking out a self employed mortgage. The more income you have declared the bigger the mortgage you can get.
The deposit required for a self employed mortgage is the same as employed workers. The minimum deposit you need to put down for a mortgage application is normally 5%. If you only have one year’s accounts, you might need to put down more though.
There are a lot of mortgage options for contractors. More and more people work from short term contracts these days. If you can demonstrate a good track record, then the Lenders can consider taking your “daily rate” rather than your net profit.
It’s really good for contractors though as Lenders will consider treating you as self employed instead if that works out better.
The Lender will also ask you how long is remaining on your current contract. They need to have the confidence that your income will be ongoing to ensure you can afford your mortgage.
It could be possible to get a mortgage even if this is the first contract you have had depending on your specific circumstances.
Unfortunately, “self certification” mortgages were widely abused in years gone by and there is little prospect of these returning anytime soon.
There is no doubt that getting a mortgage as a sole trader, partner or Company Director can be more complicated than it would be for an employed person.
As always, some Lenders are more flexible than others and in my opinion, it’s vital that you get a local Mortgage Broker on your side early in the process. This will give you a realistic expectation from the start.
Getting a self employed mortgage can sometimes take a lot of planning ahead. Sometimes if an applicant has not earned enough in previous years, we are able to make 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.
As a company, we have great knowledge of self employed mortgage advice and a large number of specialist lenders on a panel with thousands of products available to look at.