Are you self-employed and need a mortgage? It’s not as hard as you may think…
Being self-employed has its perks…and its problems!
Thousands of successful Brits have to jump through many loop holes in order to become a homeowner.
Self-employed Brits are on a level playing field when applying for a mortgage despite tough new rules, the financial regulator has insisted. The Financial Conduct Authority acknowledges that some lenders think affordability rules are too tough on self-employed borrowers.
What changed?
After the financial crisis, regulators decided to bring in stricter rules on who lenders could or couldn’t hand out mortgages to. This was known as the Mortgage Market Review and came into force in 2014 with an aim to stop reckless borrowing. But this meant more paperwork for Britain’s army of self-employed workers.
The typical borrower must produce paperwork showing 2 to 3 years of earnings, according to the FCA report. Lenders may ask to look at business accounts as well as self-assessment tax returns.
Self-employed borrowers tend to have more unpredictable incomes than other employed workers, resulting in limited resources. This made way for rogue ‘self-cert’ mortgage lenders promising easier borrowing with higher interest rates.
Still, things appear to be improving for the self-employed.
In 2011, roughly 90,000 self-employed borrowers managed to take out a mortgage, and although this number dipped in 2012, last year it was up to 100,000.
The report said: “Some lenders also felt that our existing rules did not cater for particular borrower types such as older borrowers or the self-employed.”
I’m self-employed – why are the lenders so scared of me?
OK, YOU know you can afford your mortgage payments – and you’re probably paying more in rent.
But lenders find it difficult to assess people who are self-employed. This is because the category covers so many different business types, and different levels of income.
Many self-employed people find their income can go up and down. If you haven’t been in business very long, the lender may also feel that you are not well enough established to expect a regular income in the long term.
How do I show I can afford the mortgage?
Self-certification – where you could just declare your income – no longer exists.
Most of the main high street lenders will want to see two to three years’ worth of accounts or tax returns:-
1. Use an accountant
Most lenders will accept your evidence of income in the form of yearly accounts if they are provided by a certified or chartered accountant.
2. Ask for an SA302 form
Lenders are also likely to look at the income you have declared to the tax man in a form known as an SA302. Your accountant will be able to request one for you. Or you can call HMRC yourself on 0300 200 3300. You’ll need your basic personal information along with your UTR (10 digit Unique Tax Reference) and NI Number.
3. Keep tabs on your spending
All lenders now assess how well you can afford a mortgage by looking at all of your regular outgoings including food bills, telephone bills, school bills and maintenance payments. Reduce the amount you spend in the year before you apply – you can read more here.
4. Save for a larger deposit
You are likely to need a deposit of up to 20%, especially if you don’t have a long history of accounts. So you will need to get saving – here’s some tips to make your money work for you.
5. Improve your credit rating
Pay off any debts as soon as they are due, including credit cards and phone bills, to ensure you have a good credit rating. Ensuring you are on the electoral register at your current address will also help your credit rating.
What can I do if I don’t have two years’ accounts?
There are many more lenders than the ones you see on the high street. Some of these lenders look at each case on its individual merits and may be more lenient.
However, you are likely to need a minimum deposit of 20% and you will pay slightly a higher interest rate than those available on at a high street bank.
You will also often only be able to apply to these lenders if you go through a qualified mortgage advisor.
The self-employed dilemma: Shrink the tax bill or grow your earnings?
The amount of any mortgage that you can borrow is primarily based on the amount of money you earn.
Many self-employed people minimise their earnings in their accounts in order to pay less tax. But if you reduce your income, you will also reduce the amount that you can borrow to buy a house.
Therefore the best thing that you can do to get a mortgage is increase the amount you declare to the tax man.
Applying for the mortgage
If you think you’ve got what it takes, you should also try to get yourself the best deal. Contact us on 01604 636279 or email your requirements on enquiries@turnberryfp.co.uk.
