Over the last decade, the number of self-employed has increased massively and now accounts for 15% of the working population, rising from 3.3 million in 2001 to 4.8 million in 2017.
Following the aftermath of the recession, the number of self-employed workers aged 65 and above has nearly tripled, and the number of young people aged 16 to 24 has nearly doubled with a total of 181, 000 classified as self-employed at last count in 2016.
The demand for mortgages from self-employed and contract workers is rapidly exceeding growth from that of employees, which has forced lenders into loosening the ropes around borrowing to include those who work in a new ‘gig economy’.
Many believe self-employment has flourished with the rise of technology. The digital world has presented more opportunities for modern-day entrepreneurs making it easier and more accessible than ever to start a business.
Whilst the recession may have initially forced people’s hands, the online world continues to fuel it – making freelancer work a more flexible and attractive proposition in today’s working world.
Although the same mortgage opportunities should be available to all, sadly this isn’t always the case. And whilst there’s no such thing as a ‘self-employed mortgage’, with everyone applying for the same products, it can be a much tougher process for the self-employed and contract workers. But, with the right paperwork and background checks – it is definitely possible.
This article gives advice on how to get a mortgage if you are freelance, by improving your chances to open up opportunities, helping to get the best freelance mortgage available for you.
Why is it harder?
The financial crisis has taken its toll on self-employed lending. Gone are the days of self-certification mortgages which required no proof of income. Times are tougher and it can certainly be a more difficult process – largely because lenders are less likely to take a risk on those with fluctuating incomes.
A common problem self-employed people face when applying for a mortgage is having only one year of accounts. Most lenders require two or three years, though there are some specialist lenders who will consider applicants with less. Be aware that lenders will average out the last two or three years of accounts, so be mindful of this when completing your accounts.
Proving your income
Generally, the longer you’ve been self-employed, the better. The more years of accounts you have on record, the better, to help open up a larger choice in lenders.
Potential lenders will assess you on business profits and could request evidence to support predications that you’ll earn similar sums in the years ahead – asking for information on your business to see what contracts or clients are lined up.
You will need to prove the income you have declared, and this can be done by supplying the accounts of the business. Lenders will want to see the income you’ve reported to HMRC and any tax paid. SA302 forms show this information, as does a “tax year overview” – HMRC can provide both.
Alternatively, an accountant can be used to complete and file the company accounts on your behalf, providing an accountant’s reference and necessary documents to support your mortgage application.
Mortgage brokers apply different rules depending on whether you are self-employed, a partner, or director of a limited company.
- Self-employed A lender will typically class you as self-employed if you own more than 20 or 25 per cent of the business. The most common way a lender will analyse earnings is by looking at the net profit of your business – whether you’re a sole trader or freelancer.
- Partnerships Most lenders will treat partners in a business in a similar way to self-employed borrowers. Typically looking at net profit share when calculating how much you can borrow.
- Directors of limited companies As a director of a limited company your total income may be made up of a combination of basic salary and dividend payments. Lenders will usually consider both these elements of your income, although exactly how they treat it can depend on your share of ownership.
Use an accountant
How your accounts are presented could have a major impact on how much you might be able to borrow.
It’s certainly possible to submit proof of your own accounts using the required HMRC documents from a self-assessment tax return. Some lenders will be more than happy to accept these and consider this satisfactory proof when applying for products.
However, it’s worth bearing in mind other lenders won’t even consider applicants without accounts that have been prepared and signed off by a qualified, chartered accountant; in order to be certain of the accuracy and reliability of accounting.
Something to bear in mind if you do use an accountant, it’s common practice for them to try and legally minimise your declared income so you pay less tax by offsetting profit against taxable expenses. Whilst this is good for keeping down the tax bill, it could have an adverse effect when you apply for a mortgage, as your accounts will show a smaller profit which will be taken into account when a lender is assessing your figures.
Gaps between contracts
While there are many advantages to being self-employed, the one at the top has to be the ‘flex-appeal’ in managing your own schedule. Fitting the business or work around your personal circumstances and life commitments – is all up to you to decide.
To err on the side of caution, in the lead up to applying for a mortgage and buying a home, it’s advisable to minimise the length and number of gaps in between contracts and jobs.
Lenders will be looking for consistency with business owners who are reliable, assured monthly payers. They could become wary or even put off by borrowers with lengthy gaps and sporadic periods of time off between jobs.
Getting things in order – finances and credit score
Top tip: at least six months before you apply for a mortgage, check over your finances and review everything in detail. By taking precautionary measures in advance, to strengthen your credit score will pay dividends later, and bolster your position when it comes to applying for the mortgage, providing the necessary evidence and documents to support your application.
As a guide:
- Check your credit score – make sure there are no adverse entries against you, particularly ones you’re not aware of.
- Ensure you’re on the electoral roll – check with your local council, this will help your credit score.
- Make sure your accounts are up to date – make sure everything is paid on time and there are no overdue bills or outstanding payments.
- Stay away from payday loans – payday loans are a red flag to lenders, signifying your business is in financial trouble. Many lenders will decline to lend if there is a recent record of any payday loans.
- Minimise credit checks for other insurance or credit applications – be aware that multiples credit checks in a short space of time can reduce your overall credit score.
- Don’t allow your credit card to reach its limit – the higher the % usage of your credit card will result in a lower credit score. Spread outstanding balances across two cards, rather than having one up to the limit.
- Don’t make minimum payments – making minimum payments can suggest financial difficulty.
- Cut back on luxury/splurge spending – during the six months in the build-up to applying for a mortgage cut back on any big purchase or erratic and frivolous spending.
Build a bigger deposit
As with any large financial purchase, the bigger the deposit you’ve got to put down, the better the deal. The less you have to borrow, the less risk you are to the lender – it makes sense. A robust deposit will position you more favourably with lenders and attract lower interest rates and a more affordable monthly payment.
Most lenders require a deposit of at least 10-20%, and if you don’t have a long history of accounts, you may need an even bigger deposit to convince a lender.
Get advice from the experts
There are two things to bear in mind when making the decision on whether to seek help from a mortgage expert.
First up, if you were to apply for a mortgage on your own and should the lender decide to reject you, this would be recorded on your credit file and could potentially, damage your credit score for the future, making it harder for you to be accepted the next time you attempt to apply.
Secondly, specialist brokers have the best resources at their fingertips and are ‘in the know’ when it comes to industry information – for example: who has the strictest lending criteria, which banks and building societies are more flexible in lending to self-employed, and the lenders more likely to offer a competitive interest rate.
Information like this will help massively, not only by cutting down the time involved, but also by helping to avoid any pitfalls and unnecessary approaches to unfavourable lenders.
By opting to work with an expert, it could help to offer peace of mind, making the process more efficient and smoother to help achieve the best possible result.
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