Mortgage process for the self-employed

Latest statistics from Payscale put the average UK salary for a permanent worker at £25,458. 

For the self-employed, a salary is 'meaningless' as some months there will be huge profits and some months there may be a lot of belt-tightening, but for the sake of comparisons let us assume that, net of taxes, the average self-employed person brings home £25,000 a year.

With the Halifax House Price Index puts the average UK house at £220,962 as at the end of April 2018, it is clear there is a huge disconnect between the ability of many self-employed Britons to be able to save enough for at least a 10 per cent deposit on a property.

As long as you’re earning decent money and your income is fairly balanced and sustainable, you shouldn’t have many problems getting one. Jamie Smith-Thompson

Of course, it is not impossible for someone to save up, and there are government schemes such as Help to Buy and Shared Ownership schemes, which have been put in place to help more people onto the housing ladder.

However, there can be additional complications for those who are self-employed when it comes to getting a mortgage, which need to be overcome.

Irregular income

The biggest issue is the fact many self-employed people generally have an irregular income stream, rather than "balanced and sustainable", which can be off-putting for some lenders.

Zane Groves, consultant for LightBlue UK, comments: "Self-employed mortgages are generally regarded as a bit of a problem area."

That said, he is clear there is no shut-door policy, although there is no specialist lender catering only to the self-employed.

He states: "There's no such thing as the self-employed section, or a self-employed lender. All lenders cater for individuals who work for themselves."

Of course, the longer your clients have been in business, and the more paperwork you can show to lenders, the more likely your clients are to get an approval.

Mr Zane explains: "The longer your track record, the better and if you have more than two years of accounts the choice of lenders available is substantially more than just one year. 

"It is important to know which lender does what."

Martin Stewart, director at London Money, agrees the longer the client has been in business, the better-received they will be by a lender.

"The one thing we say to clients is that no mortgage broker wants the phone call that goes: 'I went self employed two months ago. Can I get a mortgage?'."

He advises that any major life change needs to come about only once you have secured your finances, otherwise you will probably spend 12 to 24 months being forced to do a lot of DIY on a house you probably don’t want to live in. 

"There are a few lenders that will help people who only have one years' worth of accounts.

"There are also one or two more established lenders that will look to work off limited company accounts and lend against the net profit of the business, as opposed to the income the business owner has taken.

"This can be a very useful tool for those who run their businesses and personal finances efficiently and who draw lower personal income as a result."

Choice and competition

For many advisers, there is still a lack of competition in the market for the self-employed. Mr Stewart comments: "The borrower needs to be aware that if they are fishing in a smaller pond they will likely be restricted by the fish they can catch.

"By this I mean the fewer lenders there are on offer, the less competition the borrower can expect to see," he explains.

Mr Stewart adds: "There have been improvements for the self-employed when it comes to getting a mortgage but more can be done."

All doom and gloom?

In its latest bulletin, the Association of Mortgage Intermediaries (Ami) claims there has been a rise in the willingness of lenders to consider applications from self-employed people in the UK.

The bulletin stated: "Ami has been pleased to note an increasing willingness among mainstream and high-street lenders to consider more complex income borrowers.

"The self-employed sector of the mortgage market has been under-served for several years with small and medium-sized building societies and specialist lenders making up the bulk of this segment. 

There are a few lenders that will help people who only have one years' worth of accounts. Martin Stewart

"However, pressure on margin appears to be encouraging more lenders to consider borrowers whose incomes do not necessarily fit a straightforward mould."

However, Ami also notes that the Bank of England has warned lenders against "moving up the risk curve" so hopefully this will not lead to an eventual tightening of criteria. 

For Jamie Smith-Thompson, managing director of Portafina, it is not impossible to get a mortgage if you are self-employed but it helps if you have a decent track record, and for him, this is the key thing that clients need to consider.

He says: "The simple fact is, if you don’t have three years of accounts, it is highly likely you won’t be able to get a mortgage.

"Yet, if you do, it’s not as difficult as you might think. As long as you’re earning decent money and your income is fairly balanced and sustainable, you shouldn’t have many problems getting one."

simoney.kyriakou@ft.com