What counts as Self-Employed?
When it comes to mortgage applications, in order to be considered a Self-Employed applicant, the majority of your income must be from a work activity that is considered Self-Employed. This includes:
- Sole Trader or Freelance work
- Contractor work
- Limited Company Directors
- Partners owning more than 20-25% (depending on lender criteria) of a business
Unfortunately, despite the rise in popularity of Self-Employed work, this type of income is still considered to be less stable than PAYE income by Mortgage Lenders.
In order to mitigate some of the perceived risk in Self-Employed income, lenders use an average of your earnings over a number of years. You will still be assessed the same way, in terms of affordability and credit score, you will just need to provide more substantial evidence of your earning history than employed people. That said, there are a small number of banks who will consider income from your latest years results if the trend is upward over recent years. On the flip side, if the latest years figures are lower than the previous year, banks will tend to take this figure rather than average the previous two or three years.
Proving your income
The proof that you need will depend on the Self-Employed activity that you carry out, as per the below:
Sole Traders/Freelancers
Lenders consider your personal income for the past two to three years, depending on their own criteria. In order to prove this income you will need to provide either (and sometimes both) of the following:
- Certified accountants certificate (most lenders have a template that accountants can use)
- Tax computations and matching year tax overviews (previously known as SA302 forms)
Limited Company Director/Partner
Limited Company Directors’ income is assessed based on their personal basic salary and dividends in most cases, although a small number of lenders may also be willing to consider net business profits.
As a Partner to a Limited Company Director or business owner, only your share of the net business income will be used in the lenders’ calculations.
In both cases, some or all of the following documents will be required to prove your income:
- Certified accounts
- SA302 forms
- Business banking statements
- Some lenders may want future to see income projections (from a qualified accountant) and business plans, particularly if you have been trading for a relatively short time period
Proving your income as a Contractor
As a Contract worker, it depends on the lender, with most using an average of your previous year’s accounts, although some will be willing to look at your day rate, if that’s how you are regularly paid. In this case, your annualised day rate is used to determine your annual income. Lenders using your day rate will usually annualise this over 46 or 48 weeks to allow for holidays.
Regardless of the type of pay you receive, in order to prove your income, you will need to provide some or all of the following:
- Certified accounts
- Tax computations and matching year tax overviews (previously known as SA302 forms)
- Often lenders will want evidence of ongoing contract availability, signed contracts and extensions are ideal for this
Can I still get a Self-Certified Mortgage?
Self-Certification mortgages were discontinued in 2014 and are no longer available. Unfortunately this form of financing led to borrowers over-extending their affordability. As a result of this, all Self-Employed mortgage applicants now need to substantially evidence their income.
How do you get a mortgage if you are Self-Employed?
Self-Employed mortgage applications are the same as any other application, with the exception that you may need to provide additional proof of income. You use the same route as other applicants (and can access the same interest rates), the services of Mortgage Brokers like ourselves, can be beneficial to Self-Employed applicants.
How do I improve my chances of securing a mortgage as a Self-Employed applicant?
Preparation is key to a successful Self-Employed mortgage application. Before applying for a mortgage, Self-Employed borrowers will benefit from the following:
Financial Preparation
If you can increase your income in the years leading up to your mortgage application, this will obviously give you the potential to borrow more. A mortgage calculator can help you to see how much income you will need for the repayments on your mortgage for different valued properties.
It’s also important that any accounts you will be using as support to your application are signed off by a certified accountant.
Increase deposit saving
As with all applicants, being able to provide a more substantial deposit can improve your chances of being approved for a mortgage as lenders credit scoring can be stricter at higher loan-to-values. In some cases, it may be worth waiting until you have a larger amount of deposit saved, as this can also give you access to lower mortgage rates.
Check your credit score
Any of the credit reference agencies will allow you to check your credit score easily, online. If possible, improving your credit rating will improve your chances of achieving a mortgage and can increase the loan the lender is willing to offer. Try the following:
- Close old accounts
- Update address details for all accounts
- If not already, register on the electoral roll
- Pay all bills promptly
- Minimise use of credit cards and other credit facilities
Speak to Purely Financial Planning
Here at Purely Financial Planning, we specialise in helping Self-Employed applicants to find the most suitable mortgage product and lender to suit their circumstances. If you approach us early on in the process, we can help you prepare sufficiently ahead of your application, to prevent the disappointment and frustrations of failed applications.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE