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How to get a mortgage if you're self-employed
Getting a mortgage when you own your own business isn't impossible but you do need the right documentation.
by Michelle McGagh on Feb 08, 2013 at 09:01
Britain has seen a boom in the number of people starting up their own businesses but what impact is this having on access to mortgages for the self-employed?
The UK now has its highest number of self-employed people ever following the loss of jobs in the credit crunch. According to the Chartered Institute of Personnel and Development, by spring 2010 self-employment was higher than at the start of the recession and by autumn 2011 the number of self-employed people had reached a record level of 4.1 million, or 14.2% of the working population.
Being self-employed obviously has an impact on personal finances. People have to take control of their own tax bills and pension contributions. They also need to be aware of the hurdles they will have to jump when applying for a mortgage – whether for the first time or to remortgage a property.
'It isn’t impossible for a self-employed person to get a mortgage, and in fact if your business has been running for three years or more then you will have access to most rates offered by the mainstream lenders,' said David Hollingworth of mortgage broker London & County.
‘It is possible to get a mortgage and it is not necessarily more complicated depending on your circumstances,’ he said.
Where a self-employed person may run into a problem is if the business has been running for less than two years.
‘It’s all about evidencing income and to do that lenders require two years of accounts or self-assessment,’ said Hollingworth.
No more 'liar loans'
If your business has been running just one or two years then banks aren’t going to look on you as a favourable customer. There are some people who are effectively ‘mortgage prisoners’ because they cannot remortgage their homes.
The self-employed with less than three years’ accounts could in the past turn to ‘self-certification’ mortgages, or ‘liar loans’ as they later became known when the scale of problems emerged.
In the property boom years these loans made it easy for self-employed people to borrow huge sums of money without providing any evidence of their income or business accounts and ‘self-certifying’ how much they were earning. Over a million people took out these loans and more than half of all new mortgages taken out between 2007 and the first three months of 2010 were self-certification mortgages.
The idea seems crazy now and the Financial Services Authority (FSA) banned them in 2011.
‘Because of how the market has gone there are no self-certification mortgages which were the fall-back position for the self-employed who did not have two or three years accounts – those mortgages are never going to come back,’ said Hollingworth.
‘Those people with less than that will find it really difficult to get a mortgage because [getting a mortgage] is about amassing enough documented evidence to prove your income.’
There are options
Not all lenders automatically disregard self-employed people with new businesses and there are specialist lenders offering mortgages to the self-employed if they are not accepted my mainstream lenders.
‘Those with less history can secure a mortgage, there are lenders that will look at those with less than two years and it may still be possible to find a mortgage,’ said Hollingworth.
There are some things that will help the self-employed to increase their chances of obtaining a mortgage. The first is having a large deposit, the larger the deposit the more likely you are to be considered.
Although this may not help first-time buyers who tend to have smaller deposits, it can help those looking to remortgage who have built up a large chunk of equity in their home.
Hollingworth urged the self-employed not to go straight to the specialist lenders, but to try mainstream lenders first. However, he recommended using a mortgage adviser who will ‘know who to approach…saving you a lot of wasted time’.
‘Do not go straight to specialised lenders – some like Kensington Mortgages will specifically consider one year's accounts but they would prefer more. They are trying to put themselves in that specialist niche,’ he said.
‘You could get a mortgage from someone like the Halifax if you have an A+ credit score. They may consider one year’s accounts.’
Hollingworth said a good credit score was ‘a given’ for obtaining a mortgage generally but mattered even more when a self-employed person was seeking a mortgage.
What will banks look at?
As far as business accounts go, lenders will look at the net profits of the business or your income stated in your SA302 form if you are self-assessed for tax.
Keep in mind that good accountants try and minimise tax for their clients so if you are a registered business your actual income will be low so net profits of the business will be a much more favourable method of determining your financial strength.
When lenders determine how much to lend and how much you can afford to pay, they will base their calculation either on the last year of accounts or an average of the past few years.
‘If the accounts have been steadily rising then they will be able to use the last year [when calculating borrowing] but if the accounts have been up and down over the last few years then the bank will look at the average income,’ he said.
Some lenders will also be more helpful if your accountant is certified or chartered and some lending criteria requires the accountant to have one of these qualifications.
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