With 4.7 million self-employed people in the UK, the mortgage market has responded by making it easier than ever for the self-employed people to get a suitable mortgage.
Historically it has been slightly more difficult for self-employed people to get a mortgage, but that has changed thanks to the growing trend towards people starting their own business.
Where fundamentally the mortgages are the same, there are a few basic differences between the mortgage application process for the self-employed and the employed…
The Mortgage Application
Once you’ve found your property, applied for the mortgage, had the valuations, surveys and searches done etc, the administration begins.
This is where the self-employed have to provide additional information to the lender and will see the differences in the application process; especially in terms of the way their income is reported.
Essentially, a self-employed person is allowed to borrow against their profit, not against their turnover.
How is that different?
Say an employed person earns a gross salary of £30,000 per year; their take home pay (net salary) is around £23,700. Despite this, the figure that a mortgage company will base their mortgage offer on is the gross salary of £30,000.
With a self-employed person, their turnover (the revenue their business brings in) could be £50,000, but the profit only £25,000. In this case, the mortgage offer is based on the £25,000, not the £50,000, even though you could argue the turnover is the self-employed equivalent of a gross salary.
With this in mind self-employed people should look to make their business both as profitable and fiscally sound as possible
Next up is the duration of proof of income.
Typically, a lender will ask for a contract of employment and 3 months pay slips before offering a mortgage to an employed person.
This is different in self-employment, where lenders typically ask for 3 years worth of books (accounts) to assess their income and risk before they agree to a mortgage. In some cases, you can get a mortgage earlier if the lender is willing to accept a financial forecast from your accountant.
Tips For Getting a Mortgage While Self-Employed
Run your business well
Keep your books and accounts up to date and professional. A bank is hardly likely to lend you potentially hundreds of thousands of pounds if your books are poorly kept.
It’s also useful to keep all of your documentation in an organised fashion – you’ll have to show it to any potential mortgage lenders, so having all of your paperwork handy will be a big bonus.
Hire a good accountant
A good accountant will keep on top of your finances for you and will be a professional and trusted ally when trying to get a mortgage while self-employed. They’ll also keep your company up to date on taxes.
Additionally, your accountant will provide you with all of your accounts in a professional and easy to read document which you will need to show your accountant.
Be honest with cash
Although they shouldn’t, many self-employed people pocket any cash they are paid in. Where this is illegal, it’s also reducing your chances of getting a mortgage.
Every penny of income that goes through the books increases your chances of getting a mortgage. Not declaring potentially thousands of pounds in cash will seriously reduce your profits and therefore your chances of getting a mortgage.
Due to the fluctuating nature of a self-employed income, you’re likely to be seen as a higher risk. To help reduce any risk (and improve your chances of getting a mortgage), you should try to save as much money as possible.
There are two benefits to saving money in business – one is that you show a fiscally stable business. The other is you’ll need to borrow less money from the lender, improving your chances of getting the mortgage.
Where getting a mortgage if you’re self-employed is slightly more work from an admin point of view, if you run your business well, stay cash-positive and show you are profitable, it’s no more difficult than it would be for an employed person.
Use the Anwyl Homes mortgage calculator to work how much you could borrow to buy your new home.