Despite more and more people deciding to take the plunge into freelancing or contracting, it’s still notoriously hard for self-employed people to get a mortgage. The glory days of self-cert mortgages are far behind us, and if you’re looking for a lender in 2016 you’ll need to provide hard proof of your income.
And that’s where it gets tricky. Most business owners lack the regular PAYE income an employee would have – instead splitting their income between salary and dividends. Many lenders struggle to understand these complex finances – but an increasing number are up to speed with entrepreneurial finances.
A recent Government review identified the need for flexible financial solutions for home ownership to suit micro-business owners, which could help to open the market up further still.
First things first
Lenders will normally ask for 5% of the total house price up-front, so say you wanted to purchase a house for £250,000 – you would need to pay a deposit of £12,500. You’d therefore be taking on a mortgage of £237,500 plus interest, so it’s vital that your finances are in a state that show you can afford repayments.
While it’s only natural to want to borrow the biggest amount you possibly can, it’s not going to help you at all if you can’t afford the repayments.
Top tip – bear in mind that switching company type (e.g. from sole trader to limited company) before applying for a mortgage could hinder your application, as there are different proof of incomes required for each.
If you do have a limited company, also be aware that reinvesting too much of your company profits may make it appear that you’re not earning much, which could end up restricting the amount you’re allowed to borrow.
What you need to provide
If you haven’t been in business very long, the lender may feel that you are not established enough in your field to expect a long term regular income.
With this in mind, if you’re a Sole trader you must make sure you have a minimum of one year’s finalised accounts, or an SA302 (a certificate from HMRC showing how much income you’ve declared) from within the last 18 months.
The paperwork required for contractors is unfortunately a bit more elaborate. You’ll often need to provide evidence of (a minimum of) 12 months contracting experience and have at least six months remaining on your current working contract – although many lenders will need more than this, in the form of past accounts.
Which type of mortgage is right for you?
Before rushing in, it’s vital to understand the differing repayment methods. Here are some examples of the repayment schemes currently available:
As the name suggests, a fixed rate mortgage has an interest rate that stays the same throughout the duration of your borrowing. They’re usually between one and five years in length, with the main benefit being more financial stability, protecting you from any increases in interest rates. On the flip side though, you also won’t be able to take advantage of any interest rate reductions.
Unlike fixed rate, a tracker mortgage rises and falls when the Bank of England base rate changes. For example, the current base of 0.5%, plus a fixed amount – say 1.5% – would make a total rate of 2%. You can expect lower rates than a fixed rate mortgage, but be wary that if interest rates rise, so will your repayments.
This is a good option for someone already struggling with high monthly outgoings, but who expects to have the full amount ready to be paid in one big chunk at the end of the term. Your monthly repayments only consist of what you owe in interest.
What to do if you get refused
If you are turned down for a mortgage the first thing to do is talk to a broker to find out why you were refused, and what you can do to improve your chances.
Whilst the reason could simply be that you don’t qualify for a mortgage in your current situation, it may be the case that you may have approached the wrong lender for your circumstances.
How can I find the right lender?
Many High Street lenders are built for PAYE finances and don’t necessarily understand the complex finances of a business director, so be aware that many of these aren’t the best options for small business owners. Therefore it’s worth searching for specialist lenders.
These problems are precisely the reason we recently launched our own mortgage service for contractors and the self-employed. We connect freelancers, contractors and small businesses with lenders who are used to dealing with them, and understand their finances. We’re committed to making buying for the first time as simple as possible, and you’ll always get a dedicated contact to walk you through the otherwise complicated process.