Getting a mortgage when self-employed

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.

 Are they a sole trader, a partner in a limited liability partnership, a director of a limited company, or a contractor?Bruno Welch

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.

Mr Rhind highlights that if someone is a contractor, then the individual will need to show the daily rate he or she earns in order for the lender to produce an average annual salary figure. 

He adds: “You should also have your SA302s/tax calculations and tax year overviews to hand, as some lenders will insist on seeing them, and not having them limits your options in terms of which lenders you’ll have access to."

The SA302 is a document issued by HMRC showing evidence of earnings for the last four years once the individual has sent his or her self-assessment tax return. 

This differs from PAYE, the method by which an employer deducts tax and National Insurance contributions from wages or occupational pensions before paying out wages or a pension. 

If you are self-employed, it’s best to use a broker to get a mortgage rather than go directly to high street lenders.Becky O'Connor

Amit Patel, mortgage and protection consultant at Trinity Finance, highlights that a common misconception that lenders make while calculating borrowing potential for the self-employed is to either use 'turnover' or 'total gross profit' of the business. 

“For a sole trader, the figure that lenders will use is the ‘net profit’ after deductions and expenses.”

He adds: “This is the figure that the client's tax is calculated on. It can also be a lot lower than the gross profit, which then makes a big difference to the amount the client could potentially borrow.”

Product choice

Experts stress that even though the type of mortgage products do not typically differ for self-employed versus non-self-employed workers, the role of an adviser is key to securing the best deal, based on the various calculations different lenders use. 

Mr Welch says: "Technically all types of mortgage products are available to the self-employed. It’s how the applicant’s declared self-employed income for tax purposes and accounts are handled that will determine mortgage affordability.”

Danny Belton, head of lender relationships at L&G Mortgage Club, says: “As the number of self-employed workers and contractors continues to grow, we’re seeing more and more lenders providing product options to support these types of customers.” 

He confirms that while it is possible for the self-employed to get a mortgage direct from the high street, they are likely to be restricted by the choice of products available to suit their unique borrowing needs. 

Nathan Harris, chartered financial planner at Lothbury Group, says: “As a self-employed person trying to secure a mortgage, the value of an independent mortgage broker becomes apparent as they can work with you to establish any holes in your evidence of income and narrow down the search to mortgage providers for which you will meet their criteria.”

Becky O’Connor, personal finance specialist at Royal London, also thinks the best way for self-employed individuals to obtain a mortgage is through the use of a broker. 

“If you are self-employed, it’s best to use a broker to get a mortgage rather than go directly to high street lenders, as lenders take different views on self-employment - some applying stricter criteria than others,” she says. 

saloni.sardana@ft.com