Tax  

Getting a mortgage when self-employed

This article is part of
Guide to advising the self-employed

Getting a mortgage when self-employed

Many self-employed workers may doubt their eligibility to obtain a mortgage. 

With the number of people choosing to go self-employed growing rapidly in the UK, how acute is this problem? 

Will Rhind, mortgage expert at online broker Habito, says: “Some 15 per cent of the UK’s workforce is now classed as self-employed, and that percentage is growing.

"But, despite more and more people being self-employed, it can make getting a mortgage more fiddly.” 

Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self Employed, agrees. 

"Many traditional lenders will discriminate when considering mortgage applications from the self-employed," he says.

He adds: "We hear stories from very successful freelancers who are struggling to buy a home, especially in dual self-employed households.”

Commentators in the industry stress that while the self-employed can still obtain a mortgage, the loose definition of a self-employed worker can make calculating mortgage eligibility difficult for lenders. 

How to define self-employed

Hannah Owen, financial planner and mortgage adviser at Quilter Private Client Advisers, says: “If someone works for themselves and sets up as a limited company, they will pay themselves a steady salary and also pay themselves in dividends (most likely)."

She adds: “Lenders will need to consider both of these forms of income.” 

There are various ways the self-employed can look to obtain a mortgage but there are a number of key criteria regarding their self-employment that need to be taken into account.

“Are they a sole trader, a partner in a limited liability partnership, a director of a limited company, or a contractor?” asks Bruno Welch, managing director and mortgage consultant at Clayton-Welch Associates.

Ms Owen adds: “If a client is a sole trader, this is when more documentation is likely to be requested.”

This view is echoed by several others.

Documentation 

Lee Rhodes, a financial adviser at Rhodes Advisory, says: “If you are employed, you would usually be expected to show the lender your last one to three payslips in order to prove your annual income.”

He explains that when an individual is self employed (sole trader or freelance), lenders will usually want to see your last two or three years of tax calculations with matching HM Revenue & Customs tax year overviews.

But if the individual is a director or shareholder of a limited company, “then income may be structured through salary and dividends which can be evidenced through tax calculations and matching HMRC tax year overviews,” he explains.

There are some lenders that will also allow the use of salary and share of net profits, evidenced by company accounts to show the net profits and tax calculations to evidence the salary. But Mr Rhodes' view is that more lenders accept salary and dividends than salary and share of net profits.