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Self-employed mortgages – can be a headache, but doesn’t have to be.
The mortgage process for self-employed individuals can, at times, feel like there’s many hoops to jump through.
Many self-employed people are in the same boat.
However, the process might not be as mind-numbing as you think.
Preparation is key, so working with an experienced mortgage broker that knows self-employed criteria well, early into the buying or remortgaging process, can prove to be very useful.
At Rosehill we’d carry out a full assessment of your documents and aim to have you fully prepped for your property search or remortgage to allow for a smoother process.
In the meantime we’ve created a simple guide on on self-employed mortgages below.
The simple answer is yes.
It might not be as straightforward as a mortgage application for an employed person, however there are some mortgage lenders who even have a specific focus and specialise in mortgages for the self-employed.
You’ll find that different lenders will have different eligibility criteria for self-employed applicants, which be dependent on whether you’re a Limited Company Director, a Sole Trader, or a Contractor.
A mortgage broker with good knowledge of mortgage criteria for the self-employed will help you save time in your search.
At Rosehill, we take pride in building long-term relationships with our clients. We don’t see ourselves as just a mortgage broker, but rather a trusted partner who will be with you every step of the way.
At Rosehill, we take pride in building long-term relationships with our clients. We don’t see ourselves as just a mortgage broker, but rather a trusted partner who will be with you every step of the way.
Sort your finances first, BEFORE you start looking at properties.
This will allow you to know your maximum budget and how much this will cost you. Speak to a great budget early into the process.
You’ll need to gather a few documents to prepare for your mortgage application. You can find a more extensive list of documents to gather here, but as a summary you’ll need:
Once you have these documents gathered, send them over to your mortgage broker to review and complete their fact finding process to they can make a mortgage recommendation on this basis.
After, once you’re happy with this recommendation, your broker can have an agreement in principle in place for you, to put you in a better position to make an offer on a property.
Then it’s a case of finding that property to have your full application submitted and (hopefully) approved!
At Rosehill we’re not too keen on simple self-employed mortgage calculators, as criteria can differ substantially from lender to lender when assessing a self-employed mortgage application.
Working out how much you can borrow for a mortgage when you’re a self-employed is not a very straightforward task.
As different lenders have different criteria surrounding which forms of income they’ll use and whether they’d average your income over the years or use the latest year’s income means that the maximum lending could vary quite substantially.
As a rough estimation, take your average your earnings over the last two years and multiple this by 4.5x.
This would be your net profit from self-employment for Sole Traders and Partnerships and your salary & dividend figures for Limited Company Directors.
There are some instances where we can use your latest year’s or one year’s accounts, or even look to use Limited Company net profits, so we recommend you speak with a mortgage broker to get tailored advice based on your circumstances.
Here’s some of the main other factors involved when it comes to working out your maximum borrowing.
It’s key to note that there are many additional factors that may be involved when it comes to working out your maximum borrowing, depending on your circumstances, which is why we recommend speaking to a great mortgage broker in detail.
Lenders are generally going to be taking into account all expenditure. This will include utility bills, student loans, car finance, personal loans, credit cards, childcare costs and the list goes on!
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The more debt and committed expenditure that you have, the less disposable income that you’re going to have.
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Therefore, generally speaking, the less debt and committed expenditure you have, the more you’re going to be able to borrow.
Your dependents would be anyone who is financially dependent on you, such as children or an elderly relative.
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Similar to your debts and committed expenditure, mortgage lenders may lend you less money if you have more financial dependents.
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This is simply because these financial dependents are costing you money each month, so your disposable income will be lower.
If you have a good credit score, you may find that there’s more mortgage products available to you.
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If you have a bad credit score, you may find that you’re limited to the mortgage lenders that you can proceed with, depending on how bad your credit history is.
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You may find that an adverse credit history results in the mortgage products available to you having higher interest rates.
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This is because you’d essentially be considered as a higher risk to the mortgage lender.
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So what can impact your credit score? One example would be taking out any new line of credit. If you take out a new credit card, a loan or car finance, whichever it might be, this will impact your credit score.
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Another factor that can impact your credit score is any adverse credit (e.g. missed payments, defaults, county court judgements etc.).
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These are just a couple of factors that can impact your credit score – if I was to try to name all factors, we’d be here all day!
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Have your mortgage broker check over your credit file to see if there’d be any issues.
The mortgage product that you choose can sometimes have an impact on the maximum amount that a lender is willing to lend to you.
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For example, a lender may lend you a little bit more if you take out a product with a longer fixed period (for example a five-year fixed as opposed to a two-year fixed).
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However, this does not necessarily mean that a longer fixed period (or any fixed mortgage products for that matter) would be most suitable for you.
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Also, if you’re looking to take out a shorter mortgage term – the length of time that the mortgage actually runs for – then there may be a limit on the maximum amount that you can borrow.
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Reason being is that, once you shorten that mortgage term, the mortgage payments are going to be higher, so it’s going to eat into your disposable income that little bit more.
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The mortgage term can also be impacted by the age of the eldest applicant on a mortgage application.
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Generally speaking, the older you are when you apply for a mortgage, the lower the maximum mortgage term is like to be (although lending into retirement may be an option with some lenders).
If you have a larger deposit, you’re generally seen as lower risk to a lender.
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With this being the case, if you do have a larger deposit, some lenders may increase their maximum lending.
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On the flip side, if you have a very low deposit (for example 5%), some lenders may choose to limit their maximum lending.
It is possible to secure a self-employed mortgage with as low as a 5% deposit, although a smaller selection of mortgage lenders will be available when compared to a deposit of 10% or more.
Some factors that may influence the deposit you need include:
There are schemes such as the Mortgage Guarantee Scheme through the Government which may also be available to you at the 95% loan to value range.
Generally speaking, up to a certain level, lower interest rates become available at each 5% increment in your deposit (5%, 10%, 15% and so on).
Many lenders will require at least 2-3 years’ trading history before considering a mortgage application for a self-employed individual.
This is because lenders want to be comfortable with the health & profitability of a business over a longer period of time.
That being said, there are some lenders who can consider one year’s accounts.
Although we’ve received enquiries from many self-employed individuals who believed this was the case, self-employed mortgages do not automatically come at a higher interest rate.
Providing your profits/income is sufficient and you have a good trading history, you should be eligible for the majority of mortgage products than an employed individual is eligible for.
If your income is particularly complex, a mortgage product with a more specialist lender may be more suitable for your circumstances, in which case the interest rates may be higher.
There’s is no harm in going to a bank or building society, and it can be quite an easy place to start when you don’t know where to start.
That being said, you could go to a bank for a two or three hour meeting just to be told that they’re not happy to lend to you.
You might even be told that they are happy to lend to you, subject to you find in a property, but the property you end up finding might not fit their criteria.
So then it’s back to the drawing board.
Going direct to a bank also means that they can only advise you on their products. Whereas if you go to a mortgage broker, they can discuss lots of different lenders’ products with you.
You could also spend hours on end looking on comparison sites, but when you’re self-employed, different lenders will assess your income in different ways, so it’s tough to know how much exactly certain lenders will lend to you.
In all honesty, while a low rate is good, because you’ll be spending less, it’s not the only thing that you should be focusing on. You might find that flexible product is more suitable for you than the very lowest interest rate.
For example, you could get a fixed interest rate with no early repayment charges just to give you that extra bit of flexibility, or you could find a product that offers an offset facility.
Using a great independent mortgage broker can just save you that time and hassle that you’d spend looking for mortgages on your own.
1. Find a great mortgage broker and solicitor early into the process.
2. Check your credit report, or have your mortgage broker check, to ensure there’s no nasty surprises.
3. Use an accountant – this can improve your chances of mortgage success as some lenders might want to see projections of your following year’s income.
4. Take a look at your balance sheet – you’ll want to ensure your assets outweigh your liabilities.
5. Directors loans cannot be used as income for your mortgage.
6. Ensure you’re on the Electoral Roll at your current address.
We focus on building long-lasting relationships with clients.
We therefore charge a reduced fee for our existing client remortgages.
Click here for more detail.
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As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments. Think carefully before securing any other debts against your home or property. The Financial Conduct Authority does not regulate commercial buy to lets and some forms of commercial mortgages. You may have to pay an early repayment charge to your existing lender if you re-mortgage
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Rose Hill Financial Services Ltd is authorised and regulated by the Financial Conduct Authority. You can find us on the Financial Services Register https://register.fca.org.uk/ under reference 912303. Registered office address: 1 Bell Street, 2nd Floor, London, England, NW1 5BY. Registered in England and Wales. Company registration no: 11997519.
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