Lenders will view you as self-employed if you own more than 20% to 25% of a business, from which you earn your main income.
You could be a sole trader, company director, or contractor.
If you’re self-employed and looking for a mortgage, you will, in theory, have access to the same range of mortgages as everybody else and you’ll need to pass the lender’s affordability tests in the same way as any other borrower.
However, as there is no employer to vouch for your wage, self-employed people are required to provide far more evidence of their income than other borrowers.
Since the introduction of the Mortgage Market Review in 2014, mortgage providers have considerably tightened up their lending criteria and need to be convinced that you can afford your mortgage before they agree to lend you the money.
To prove your income when you apply for a self-employed mortgage, you will need to provide:
- Two or more years’ certified accounts
- SA302 forms or a tax year overview (from HMRC) for the past two or three years
- Evidence of upcoming contracts (if you’re a contractor)
- Evidence of dividend payments or retained profits (if you’re a company director)
- Lenders also prefer self-employed mortgage applicants to provide accounts that have been prepared by a qualified, chartered accountant; that way they can be sure of your reliability. It’s likely that they will focus on the average profit you’ve earned over the past few years.
If you only have accounts for one year or even less, you may find it a challenge to convince a lender that you can afford to repay a mortgage – but, again, it’s not impossible. Having evidence that you’ve got regular work or providing proof of future commissions may help.
Just be aware your choice of mortgages may be more limited.
Having a healthy deposit and a good credit history will also help your chances of securing a mortgage when you’re self-employed.
As well as providing evidence of your income, you will also need to provide:
- Driving licence
- Council tax bill
- Utility bills dated within three months
- Six months worth of bank statements
- Lenders will want to examine your bank statements to look at how much you spend on bills and other costs to be certain you could afford your mortgage repayments.
They may ask about:
- Household bills
- Travel and commuting costs
- Credit card and store card repayments
- Loan repayments
- Car finance agreements
- Catalogue credit accounts
Self-employed mortgages aren’t necessarily more expensive. As long as you’re able to supply enough information about your income, you should qualify for the same mortgage deal as someone with a comparable salary in a permanent, full-time job.
The mortgage rate you get is much more likely to depend on the size of your deposit, as well as your credit rating.
The more can put down as a deposit, and the higher your credit rating, the better your mortgage rate is likely to be.
However, if you struggle to get accepted by a mainstream bank, you may have to apply with a specialist lender that deals with self-employed borrowers, and you may find the rates are higher.
There are a number of steps you can take to increase your chances of being accepted for a mortgage when self-employed, such as:
- Save as much as you can for a deposit
- Check your credit rating
- Correct any mistakes on your credit report
- Get on the electoral register
- Avoid buying certain properties such as flats above commercial premises or old or unusual buildings as lenders are less willing to lend on these
Speak to one of our advisors who will look at specialist lenders if so required.