Can I get a Mortgage if I am Self Employed?
Back in the good old days there were Mortgage lenders offering "Self Certification" Mortgages! These were loans where the bank would ask you what your income was and you would state something and not have to evidence or prove it.
Sounds good right? No it wasn't and this is one of the reasons for the Credit Crunch in 2008.
I personally think its still easy for Self Employed people to get a mortgage but you must prepare and do things correctly. It is crucial that you get the right advice from people like Mortgage Brokers and Accountants and you must be well organised.
Most lenders would class you as Self Employed if you are a partner within a firm, a sole trader or you own a Ltd Company and you have more than 20% share.
There isn't such a thing as Self Employed Mortgage. Some lenders do have special rates and ranges for certain scenarios but on the whole you would get the same rate and terms if you're employed or Self Employed. The lenders would usually lend based on your drawings or profit. So this could be your dividend taken plus your salary. If you're a sole trader it could be your net profit.
For Ltd Companies, some lenders would also look at your net profit plus salary. Reason for this being that you may like to retain profit in the company and not pay as much tax. Lenders will realise its your money and therefore, this can often go towards your maximum loan or your affordability assessment.
I have helped many clients where for example, their yearly net profit might have been £100,000 plus their salary of £10,000 however, they have only taken a dividend of £20,000 from the profit (as they don't need all the money and wanted to save tax). If this client went into a high street bank, that bank may say they can only borrow based on income of £30,000. However, certain lenders could base lending on the full £120,000 assuming they are 100% shareholders or both applicants are on the mortgage for example, if a husband and wife are both 50% shareholders in the company.
Preparation is Key?
As with any mortgage or financial application the key to success is planning and speaking to the right qualified people. As a rule of thumb it would be good to have the following:
- Two years' accounts or Two Years Tax Calculations (Some lenders can use one year's)
- An Accountant
- A Solicitor
- Ideally be on the voters roll at your current address
- A good credit history ideally with no missed or late payments and no defaults or CCJs (However, some lenders will still consider applications)
- Have some credit for example, a credit card or a loan as this helps build your credit profile
Lenders tend to look at an average of your two years of accounts however, some lenders can work off the latest year's if there has been a rise in profit.
Lenders like to see you have an accountant. Some lenders state the accountant must be certified or possibly chartered. Make sure your accounts are up to date and healthy.
If you work on a fixed term contract basis, for example, an IT Contractor on a day rate some lenders may not even look at your accounts assuming you run your own business as a LTD Company. Contractor Mortgages rightly deserve their own blog but as long as you have a good track record of contracting and don't have massive gaps in between contracts, then a lot of mainstream lenders can base your borrowing on the day rate of your contract rather than any accounts.
As with any mortgage, the bigger the deposit and the cleaner your credit file, the more chance you have in obtaining a low interest rate.
What types of business structures are there?
The three main business structures are:
These are usually one man bands and income is based on your SA302 or Tax Calculation which you can get from your accountant or HMRC. Lending is simply based on the bottom line net profit, all income minus all costs will give your net profit which you pay tax on. Lenders can work from an average or possibly the latest years of income.
If you go into business with someone then you could look at a partnership. Mortgage lenders will usually look at each partner's share of the profit. They can look at the accounts or in relation to larger partnerships they can also look at tax calculations and SA302s to see the share of profit you have paid tax on.
The vast majority of Self Employed clients we help have set up as a Limited Company. This gives you more protection if something goes wrong in the business and the flexibility and control is easier with regards to tax. As mentioned previously you do still have to pay corporation tax on the profits. Lenders will base lending on the dividends and salary or the net profit and salary. Again, this could be on an average of 2 to 3 years or potentially the latest years.
Providing Your Income - As rule of thumb, lenders want to see two to three years of finalised accounts prepared by a qualified accountant. You may also need to supply two to three years worth of SA302s/Tax Calculations and HMRC Tax Year Overviews which your accountant or HMRC can provide you with.
The good thing about using a Mortgage Broker is they can tell you which lenders fit your set up and what income you have drawn or retained from the business. Some lenders work better for Self Employed clients and a good broker will know which lenders will fit your circumstances and needs best.
6 Key Tips
- Have a good accountant but don't take mortgage advice from them only tax advice
- Speak to a whole of market Mortgage Broker
- Don't try and be clever to save tax and not put everything through the books, declare your income and outgoings correctly and this will enable you to borrow based on your correct true profit and affordable figure.
- Keep up to date records and bank statements showing your earnings
- Preparation is key, ideally speak to a broker well before you plan to buy
- For Limited Company owners, don't forget lending can be based on net profit rather than dividends so don't feel the need to pull all your income out of the business in order to borrow more. This simply isn't how it works!
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