Self Employed Mortgages – Podcast
What if I am new to being self employed and only have one year accounts – can I still apply for a self employed mortgage?
The very short answer is yes. You can obtain a mortgage with one year’s accounts. This would mean having one year’s accounts completed by your accountant or one year’s tax calculation from HMRC.
What lenders are really looking out for is somebody that has perhaps only been self-employed for one year, but they’re not necessarily new to that industry. So they have industry experience. They’re looking for a track record so that they’re able to demonstrate that long term affordability for the mortgage can be sustained.
Can you purchase a Buy to Let property if you are self employed?
The way in which lenders assess your income differs from being employed to self-employed or a limited company director. But when it comes to buy to let, it doesn’t have any sort of negative impact. The same products are available to you and the same lending criteria applies. So there’s no disadvantages to being self-employed when looking to purchase investment property.
How much can I borrow on a self employed mortgage?
Most self-employed people will be familiar with a document called in a 302. This was a document that used to be requested by lenders and used to be issued by HMRC, which demonstrated what your earnings were as a self-employed person. Lenders now request the equivalent of that document, but it’s now called a tax calculation with a corresponding tax overview. So that would be if you were a sole trader.
The Process is slightly different for a limited company director. The way that companies are set up, you become an employee of your own company and typically would pay yourself a salary and would also be in receipt of dividends, obviously, if the business was profitable. So as a limited company director, lenders would be looking at your latest two to three years accounts and again, the tax return information.
This is what a lender would look at in order to calculate what they would lend you.
How does the process differ if one partner is self employed and one is in a full time position?
There is no difference at all in the process. It’s just, again, the different ways of assessing income.
So as an unemployed person, the lender is going to be looking at what your salary is based on your pay slips. And as a self-employed person, they’re going to be looking at what your income is based on your tax return information or your trading accounts produced by your accountant. So they’re just looking at two different ways of establishing what the incomes are for those two people. Then those incomes are combined to produce a total combined income to demonstrate affordability for the amount of money that’s being requested.
What’s the difference between self-employed and limited company owners when it comes to the mortgage?
I get asked this a lot because as a limited company director, you’re an employee of your own business. So a lot of limited company directors don’t understand when we use the term self-employed because they obviously don’t think that it refers to them. Now, from a tax point of view, they’re absolutely right. They are an employee. But from a lender’s point of view, they are instrumental in the success of that business.
If a limited company director owns more than twenty or twenty five percent of that business, then the lenders will treat them as self-employed, request documentation so that they can assess as a self-employed individual as opposed to an employee. Otherwise, if they were to be assessed as an employee, they would just be producing payslips. But the lender essentially wants to see the bigger picture with a limited company director because, of course, they are, as I mentioned, instrumental in the success or failure of that business moving forward.
How do I prove income? Can you recap on the documents then that somebody would need when applying for a self employed mortgage?
Typically speaking, lenders are looking to demonstrate sustained affordability. They don’t want to have a look at just one year’s trading figures. They want to look at an average over either the last two or three years to ensure affordability.
So as a sole trader, a lender would be looking for the last two or three years tax calculation and tax overview.
They may also want to see business bank statements and certainly personal bank statements to demonstrate affordability with a limited company director.
They may ask for bank statements, tax overviews and tax calculations, but also may request the latest three years or two years audited accounts from the company’s accountant. A lot of people think that self-employed applicants get a bit of a raw deal and that they’re restricted in some ways. I actually think it’s the opposite. I think there are more opportunities for for self-employed people because there are different lenders who assess income in different ways and employed people don’t benefit from that.
So, for example, there are some lenders that will take into account retained profits, successful businesses producing a good amount of profit. The directors may not want to take all of that money out to the company, pay it to themselves, pay tax on it. They may only take out what they need to take out to maintain the current sort of standard of living that they enjoy, if you like.
So the sensible thing to do is to leave that money within the business. Some lenders will actually take into account that money that has been retained in the business. So that can boost essentially the amount of money that they could borrow compared to a lender that will only take the income that they’ve paid themselves, i.e. through salary and dividends.
Can you still apply for Self Certified Mortgages?
Short and sweet answer is no.
Since the financial crisis in 2008, there was a big review on how mortgages are provided, how they’re delivered by lenders, and how lenders assess affordability and self certification mortgages were considered to be bad news.
Self certification mortgages were essentially where you declared your own income and the lender takes it on face value that that is what your income is. This was a system that was open to abuse and therefore not considered responsible lending.
In 2011, the Financial Conduct Authority ruled that self certification mortgages could no longer be arranged or that that method of assessing affordability could no longer be used by lenders.
How many times your salary can you borrow on a self employed mortgage?
The answer to this is that the amount can differ from lender to lender.
First and foremost, we need to be considering affordability. I don’t mean affordability in the sense of how much a lender deems that you can afford it. More likehow much you can afford personally, how much you’re prepared to commit each month to a mortgage payment. And if that’s only three times your income, then then that must be the overriding sort of factor in the amount of money that you can borrow.
Mortgages need to be affordable in the long term, and we’re enjoying incredibly low interest rates at the moment, which means we have very, very low mortgage repayments. That’s not always been the case and it’s certainly not guaranteed to last forever. So I think first and foremost, we need to understand clients, individual needs, clients, individual circumstances and how that may change in the future.
In terms of a lender’s point of view, lenders will typically lend anything up to five times your income that can be stretched in certain circumstances.
So, for example, what a lender would deem as a professional applicant: doctors, solicitors, architects, where salaries are going to be higher than the average and perhaps where they can see salary progression over a period of time. Lenders would be looking to offer anything between five and six times income or for. So for high earners, limited company directors earning in excess of £50,000 lenders may be willing to stretch anything up to six times income.
In essence mortgages need to be affordable in the long term. That has to be the number one consideration.
Why speaking to a broker can help? We can dig under the surface of each applicant and treat them like an individual.
I had one client who was a sole trader. Previous lenders he had spoken to would only assess him on his net profits. Now, his net profits are quite low. In fact, they’re very low because he’s invested an awful lot more money back into the business, buying equipment, a sound recording studio and equipment for that.
By delving a little bit deeper, it turns out that he’s actually a contractor and he’s contracted to a particular record label. He’s on what we call a direct contract.
So actually, there were lenders out there that treat contractors slightly differently. Instead of looking at the net profit, they looked at his contracted day rate and used a multiplier based on that day rate, which effectively is a lender using his turnover as opposed to a net profit figure to demonstrate affordability.
The initial conversation started off. I don’t think you’re going to be able to help me because nobody else has been able to. Now he is sending me links for properties on Rightmove – he is delighted because he’s going to be able to buy a property for his family, they’re living in rented accommodation at the moment. Two children, one on the way. So for them, getting on the property ladder is so, so important. He has a real opportunity as a self-employed person, whereas as an employed person, he wouldn’t have had the opportunity to present himself differently to a lender.
Current economic climate is favourable for house purchases (August 2020)
- Interest rates are low
- Stamp duty holiday
- Help to Buy Schemes
The new build scheme has been really, really successful in helping people onto the property market. One of the biggest misconceptions is that the help to buy scheme is for first time buyers only, and that is not the case. You can be a homeowner now looking to purchase a bigger property and you would still be eligible for the help to buy scheme, providing you’re selling your existing property so you can’t be a multiple property owner.
The government grant / loan, represents 20 percent of the value of the property. So you represent a much lower risk to the lender because, of course, they have a much bigger amount of equity in the property and it enables you to obtain lower interest rates again because you’re borrowing a lot less compared to the value of the property of a non help to buy mortgage and the despair can be as low as 5%.
This is changing in March 2021, so you need to get your help to buy an application in soon. Pretty much every developer is on board with the help to buy scheme. So, you know, there’s a huge amount of choice out there, right. From your smaller local developers to your big national house builders.
My biggest advice to anybody that is, as you say, a freelance contract, anybody that is self-employed or a limited company director, you have an opportunity where an employed person does and an opportunity to present yourself in a way that a lender would sort of look favorably.
There are multiple ways in which a lender can assess affordability for a self-employed person compared to an employee person. So it’s not a closed door that lenders don’t want to lend. They do want to lend. And you might be really surprised in terms of the amount of money that you can borrow as a self-employed person.