There are now 4.8 million self-employed professionals working in the UK. According to the government’s Office of National Statistics, that’s 1.5 million more UK citizens self-employed than there were 16 years ago, jumping from 3.3 million in 2001.
Despite this massive growth, there are still concerns amongst the freelance community and those hoping to join it about whether or not this rules them out of getting a foot on the property ladder.
As a self-employed professional, hoping to move or purchase your first home, you might be concerned that lenders would discriminate against you. After all, there is usually an element of uncertainty with freelance work without an employer to simply write you a paycheck every month.
However, contrary to the widely circulated rumours, getting a mortgage as a self-employed professional is entirely possible. In truth, can seem more complicated, particularly for those working as part of the ‘gig’ economy, such as Uber drivers and AirBnB landladies (called ‘contingent workers’ in the US) - but that’s only because there is often more paperwork to complete to prove your current and predict your future income.
What kind of mortgages are available?
In the past, self-employed only had one mortgage route to go down - the self-certification mortgage - but today they can apply for the same mortgage products as the full-time permanent employed. That means having access to fixed and variable rate mortgages which are interest only, tracker-based etc. In addition to that, the self-certification mortgage was officially withdrawn in 2011 by the Financial Conduct Authority. Mortgage lending in general was hugely curtailed following the 2007 credit crunch (which was caused by financial institutions freely lending billions of dollars - and pounds - to borrowers who had no hope of making their mortgage repayments).
What you need to apply for a mortgage
Not unreasonably, a lender will want to see proof of your earnings, just as if you were applying for a mortgage with a permanent job. That means at least two years of accounts (sometimes three) which are as up-to-date as possible and have been prepared by a professional (a chartered or certified accountant). They should also have been ‘signed off’ by him or her.
Ironically, an accountant who is very good at their job may actually damage your chance of getting the mortgage you desperately want. That’s because his or her expertise could result in your net income before tax being lower (i.e. they can write off legitimate expenses, get you to pay some of your income into a retirement fund and, if you are listed as a limited company, then encourage you to leave money in the business rather than withdraw it as earnings).
It should be said that if you have experienced a bad trading year and your income has substantially declined, then it is best to leave off applying for a mortgage until your net profit is looking steadier or has at least improved on the previous year’s takings. That’s because a fall in earnings could understandably make a lender extremely nervous and worried in case that downward trend continues. When business does pick up and you finally come to apply for a mortgage make sure you can explain away any downward fluctuations in business. That way your lender will feel confident you know your profession and its market well and that the downward fluctuations were more of an aberration than a trend.
How to improve your chances of getting a mortgage
The more stable your income i.e. your net profit doesn’t vary massively from year to year, then the more likely you are to impress a mortgage lender. He or she will be even more favourably disposed towards you if you can show them details of possible future earnings too i.e. a letter from whoever you are currently contracted to that confirms the contract will run for a further 12 months etc. This is because the lender wants to be able to reassure themselves that you’ll be able to make any mortgage repayments.
The longer you have been employed in your current work status, the better in terms of your mortgage credentials - especially if you can show records of your incomings and outgoings, along with a paper copy of the tax you’ve been paying to HMRC (via your self-assessment self-assessment SA302 form). The latter will also show a lender your net income before tax.
Some mortgage companies will be happier to lend if you are working freelance in the same business or profession you were permanently employed in previously. This is because you’re more likely to have contacts, pick up work quicker and have a proven track record at earning in the profession.
Other ways to get on a mortgage lender’s good side is to set down a large deposit. This not only shows that you are capable of managing your money in terms of being able to save (i.e. no big splurges at least 12 months prior to applying for that mortgage), but you’ll also need to borrow less capital and, for you, that means a more favourable interest rate.
Having a good credit record - both personally and for your business - will also show him or her that you are responsible with money. If it’s not as good as you would currently like it to be then quick fixes include closing down any unused credit or store cards and ensuring you’re on the electoral register.
If you’re looking to remortgage and have always kept your existing mortgage payments up to date then there’s no reason why your current lender shouldn’t look at your application sympathetically. In addition, you’ll have built up a nice chunk of equity to offset the amount you need to borrow.
The best advice, of course, is to speak to a mortgage broker. They will know which lenders are more favourably disposed to providing self-employed finance than others and can advise you on which are the best deals currently on the market in this respect. This could mean avoiding high street lenders and opting for a specialist company - one which focuses on self-employed mortgages and is prepared to look at other sources of wealth in addition to your net income, such as company dividends, share options etc.
If you need any further advice, do not hesitate to contact us right here, or by phone: 02890 450 550.