How to get a self employed mortgage

Knowledge base from Boox

By Lynne Gowers on 17th January 2017

How to get a self employed mortgage

Being self employed, you are part of a growth sector of the UK economy. Currently an estimated 4.6 million people in the UK work for themselves, some 15% of the population. Yet self employed professionals can still face issues and frustration when trying to get onto the property ladder or switch their mortgage.

In this guide we take a look at some aspects of what lenders require, how to work out your true income and some of your mortgage options are as a self employed worker. Whilst we have set out the general requirements, these do differ between different mortgage providers, and change over time so are indicative only. You should consult with a financial adviser or mortgage broker for advice specific to your circumstances.

The basics

In the first instance, brokers and lenders will want proof of your identity, address history, bank statements and source of your deposit.

Most of the other financial information required for your application will be contained within your financial accounts and credit report.

Over and above this, the information you will need to provide depends on the structure of your business:

Sole trader / Partnership: Minimum of 1 year’s accounts or SA302 from HMRC less than 18 months old.

Limited company: Usually a minimum of 12 months contracting experience with at least 6 months remaining on your current contract. Accounts prepared by an accountant and copies of previous self assessment tax returns will give weight to your application.

Calculating your true income

Once you have provided evidence of your retrospective income, you will to give an estimate of your future income. While it is tempting to maximise this as much as possible, keep it realistic. Over-stretching yourself with a mortgage or any loan you can’t afford just turns into a massive financial burden.

For your true income as a self employed individual there are several things that need to be considered, these include:

  • Peaks and troughs of your business
  • Other sources of income
  • How you extract your income from your business

This is where an expert broker is really worth their salt. They will take everything into your account to get an accurate picture of your real income and can then explain this to lenders so they base their offer on your actual income, not just your net profits. Some lenders specialise in mortgages for the self employed and such companies will have experience and understanding of self employed income.

Mortgage lenders usually assess applications using a combination of your credit score, earnings records, outgoings and levels of secured and unsecured debt. Invariably they will also use their own affordability calculators. These are all different so don’t panic if one lender turns you down, the next one won’t necessarily.

Options

Here is an overview of the main types of mortgage available from high-street lenders and specialist lenders:

Fixed rate mortgage

  • Frozen interest rate during the fixed period (usually 1-5 years)
  • Gives you stability in the fixed period as your payments will not go up if interest rates rise.
  • On the other hand you will not benefit from any cut in interest rates
  • There may be a penalty to end the mortgage before the end of the fixed term

Tracker mortgage

  • As its name suggests this tracks the Bank of England base interest rate, so your payments go up or down accordingly
  • Usually in place for 2 – 5 years and there may be a penalty to end the mortgage before the end of this

Full repayment

  • Your repayments are made up of the interest owed and a repayment of the capital borrowed. At the end of the mortgage term you will have repaid in full

Interest-only

  • Repayments are of the interest only, so by the end of the mortgage term you will still owe the full amount borrowed
  • Generally this is not a preferable option but useful if you expect to have the full amount available by the end of the term (eg. inheritance or sale of the property)
  • You can switch to a full capital & interest option during the mortgage term

Improving your chances

There are several steps you can take to make it more likely for lenders to look favourably on your application.

  • Ensure your accounts are up to date (how Boox can help)
  • Note that if you have a limited company and reinvest a lot of your profits, your visible income to lenders will be reduced
  • Provide lenders with copies of your self-assessment tax returns
  • Engage a specialist mortgage broker who will be able to match you with appropriate lenders and negotiate on your behalf

For accounting support if you are self employed, talk to Boox.

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Disclaimer
Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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