Getting a mortgage if you are self-employed is slightly more complex than if you are employed but understanding the steps and requirements to arranging a self-employed mortgage can be helpful. In this article, we explain what self-employed mortgage applicants should prepare, how the mortgage application is likely to be assessed and how to get the best self-employed mortgage deals.
What is a self-employed mortgage?
A self-employed mortgage is a mortgage loan for self-employed borrowers. The mortgage itself may be no different to one offered to an employed person, however, the way your mortgage application is assessed will be slightly different if you are self-employed. Mortgage lenders tend to group self-employed people into a variety of groups. These include:
- Sole traders
- Contractors
- Sub-contractors
- Bank or locum staff
- Company directors
- Freelancers
- Shareholders with more than 20% shareholding in the limited company they take an income from
If you are self-employed, your income is not usually paid via Pay As You Earn (PAYE), where income tax and national insurance contributions are taken at source. Instead, you will usually be required to make a tax declaration to pay any tax that you owe on your income.
What evidence will I need to apply for a mortgage if I am self-employed?
An initial mortgage application can be made to get a mortgage agreement in principle. This can be obtained before you are required to provide full evidence to gain a formal mortgage offer. However, you will usually be asked to provide evidence to support your earnings, financial commitments and identity as part of your full mortgage application, so it is helpful to gather this in advance. Self-employed earnings can be evidenced through your tax returns which will detail the net profit generated by your business. You should also collate evidence for any other types of earnings that you wish to use to support your mortgage application.
To help your mortgage application go smoothly, it is important that the evidence you gather is recent, accurate and presents your earnings in full. Your accountant can usually help you to present your earnings information clearly to support your mortgage application.
You will also need to provide identity documents including 3 to 6 months' worth of bank statements, utility bills and benefits statements. You may also be asked for evidence of the money that you intend to use as your deposit for the house purchase.
How long do I need to be self-employed to qualify for a mortgage?
Most lenders will require a minimum of two years’ worth of accounts or more to support your mortgage application if you are self-employed. While many lenders will insist on at least two years' worth of accounts, some will accept just one year's company accounts, so if you've only got one year of accounts, don't automatically assume that you can't get a mortgage; your choices may be limited but you can usually still arrange the mortgage that you need. If your income is from both employed and self-employed earnings, you can use both figures towards borrowing the mortgage amount required.
Lenders will typically ask for tax calculations based on your SA302 certificate, which confirms the amount of income you have declared to HMRC. It may take some time for the SA302 certificate to be returned, so make sure you submit your request promptly. Most mortgage lenders will also request your tax-year overview, which is proof of the tax you have paid.
Speaking to a mortgage specialist* can help you to select the best lender and mortgage deal to suit your circumstances and needs. It will also help you avoid making a mortgage application that ends up being declined; declined mortgage applications can damage your credit score which could make qualifying for a mortgage difficult.
What deposit will I need to apply for a mortgage if I am self-employed?
Mortgage requirements are generally the same whether you are employed or self-employed, meaning you can get a mortgage with as little as 5% deposit in some cases. It is worth remembering, however, that the bigger the deposit, the better your mortgage deal, as you'll have more choice and will likely be able to secure a better interest rate as part of your mortgage deal.
Your deposit amount will determine the loan-to-value (LTV) ratio on your mortgage. The LTV is the mortgage loan amount divided by the purchase price for the property, multiplied by 100. The most competitive and best self-employed mortgage deals are available to those with an LTV of 60% or lower. Although it is possible to get a self-employed mortgage with a 5% deposit, you may find that there are fewer mortgage deals to choose from and the lending criteria could be more strict.
You will find regularly updated mortgage deals in our article "Best mortgage rates in the UK" where we provide deals based on various deposit levels.
How to get a mortgage with bad credit if you are self-employed
Getting a mortgage with bad credit can be tricky but it largely depends on what type of bad credit you have and how long it has been since it was recorded. Minor financial misdemeanours such as a late or missed payment can be acceptable to some mortgage lenders but you will need to be selective. On the other hand, County Court Judgements (CCJs), bankruptcies and Individual Voluntary Arrangements (IVAs) could make it more difficult to get a mortgage and require specialist mortgage advice.
Remortgaging if you are self-employed
Remortgaging is a different process from applying for a new mortgage and is the process of moving your mortgage loan value from one mortgage deal to another. You can carry out the remortgage by way of a product transfer which means that you choose to switch to a new mortgage deal with your existing lender or you can remortgage your mortgage loan to a completely new mortgage deal offered by a different mortgage provider.
You should carefully consider the pros and cons of a product transfer versus a remortgage. A product transfer rarely requires you to evidence your income again as your current lender will already have this information. This could be advantageous if your income has reduced or changed in structure. While it can be often be easier to stick with your existing lender, it is a good idea to speak to a mortgage broker before you make your mind up. Mortgage deals change all the time and lenders regularly review the qualifying criteria used to check your eligibility, so a mortgage broker can help guide you to the most beneficial remortgage deal without wasting your time. You can find a summary of the latest remortgage deals in our article "Best remortgage deals in the UK".
Remortgaging an interest-only mortgage if you are self-employed
If you are currently on an interest-only mortgage, you could consider overpaying your mortgage, rather than remortgaging. Most lenders will allow you to overpay, usually by up to 10% of the outstanding balance per year. So rather than switching over to capital and interest repayment, it might be worth just overpaying as much as you can. This will still achieve the desired effect of reducing the amount you owe but you retain control and have flexibility in the amount you are overpaying each month.
If your situation changes, you can revert back to paying the interest-only portion of the mortgage. Overpaying your interest-only mortgage allows you to delay switching to a capital and interest repayment mortgage now, giving you flexibility and allowing you to remortgage at a time that may suit you better.
How to arrange a self-employed mortgage
Buying a property can seem like a challenge when you are self-employed but many lenders are offering self-employed mortgage loans. Working out how much you can borrow based on self-employed earnings may not be easy but with the right kind of guidance, you can access mortgage options to suit you budget and needs. It is a good idea to check your credit report ahead of making a mortgage application so that you can check for any mistakes or misrepresentations. You will find information about how to do this in our article "How to improve your credit score quickly".
Most self-employed borrowers should seek guidance from a mortgage broker and it is useful to choose one that is well-versed in how to help self-employed mortgage applicants. At Money to the Masses we have partnered with Habito* - one of the first online mortgage brokers that specialises in finding mortgages for a range of borrowers. Advisers at Habito have a good understanding of the mortgage lending criteria that you will need to satisfy to get a self-employed mortgage. Knowing what lenders require and how much you can borrow based on your earnings should help you choose a mortgage lender that is willing to lend you the mortgage amount you need. Also, a mortgage adviser can assist with your mortgage application ensuring everything is present.
You can contact Habito* to arrange an initial conversation with a mortgage broker who will quickly tell you how much you can borrow based on your self-employed earnings. Alternatively, you can find a mortgage broker that is local to you using the online professional directory service, VouchedFor*. VouchedFor lists financial professionals based on customer experience, locality and expertise.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito, Vouchedfor
