The rise of the “gig” economy and zero hours contracts has contributed to the substantial growth of the UK’s self-employment sector.
Since 2009, the percentage of UK workers classified as self-employed has risen from 7 per cent to about 15 per cent today.
However, a survey conducted by mortgage lender Together revealed that 36 per cent of self-employed people decided against applying for a mortgage in the last five years because they expected to be unsuccessful.
There appears to have been some basis for their pessimism, as over 20 per cent who had applied had been turned down, a fifth of them more than four times.
The main reasons for rejection are documented in Table 1 and almost all of them revolve around proof of income issues.
For self-employed mortgage applicants there is a constant tension between the desire to minimise their tax bill and the need to raise a sufficiently large mortgage.
They usually employ an accountant to help them pay as little tax as possible, consequently, lenders tend to suggest they are not earning enough.
“You can’t use income you haven’t declared to HMRC,” says Nick Morrey, product technical manager at John Charcol.
“If you’ve told HMRC you’re on £40,000 pa and told your lender, you’re on £100,000, you’ve either lied to the lender and fraudulently obtained a mortgage or you’ve lied to HMRC and withheld tax,” he says.
HMRC could decide to audit an individual in which case it could ask the lender for the mortgage application documents.
Proof of income
Mr Morrey sympathises with those who feel their application is unlikely to succeed.
Proof of income can be an issue for self-employed mortgage applicants and it can be disappointing to be turned down and the fact that people don’t want to be rejected a second and third time is a totally normal response.
However, he says that any self-employed person looking to obtain a mortgage should talk to a broker first, particularly if the income is complex with a mix of different contracts and sources, unusual expense items and retained profits.
“You’ll need a lender who is more understanding.
"They may want two years’ accounts, one year profit or contract history and a letter from your accountant to support the accounts,” he says.
If someone has only just started their business or contract, they may be better off waiting until they have proper accounts covering a year or two.
There are four or five lenders who are happy to accept one year of accounts.
There are also lenders who will calculate contractors’ salaries using 46 weeks in a year and others who will calculate based on 48 weeks.
The better informed an applicant is about how a lender works and their treatment of accounts, tax status etc, the better placed they are to obtain the mortgage they’re looking for – a good broker would be able to point them to the most suitable lenders for their circumstances.
Generally, lenders do not have a set of different rates or products for the self-employed, they treat them just like everyone else.
The challenge is for applicants to prove their regular income, especially as their income can vary, while employees’ income can be verified by their employers.
Mr Morrey says there are more mainstream lenders with good underwriting criteria in this space than specialist lenders.
For contractors he recommends Halifax, TSB and Scottish Widows, for example as very good in the self-employed sector of the mortgage market.
Pushing boundaries
However, he wants to see more innovation from lenders and quicker decisions from HMRC and the government about what is and isn’t allowed.
He says that the self-employed are constantly pushing the boundaries and it takes HMRC and lenders too long to catch up.
Lenders need to be better at understanding how umbrella companies work, for example.
Directors’ loans are another area of controversy.
Some accountants think it is legal for the self-employed individual to make a loan to the company, so that it is seen as a return on capital rather than earnings when it is repaid. HMRC is said to be looking at the practice.
However, Mr Morrey argues that HMRC should be acting more quickly to decide whether new schemes are tax avoidance or tax evasion.
It would better protect the lender, intermediary and individual.
Accountants and applicants need to think about the legality of the schemes they are using because if lenders don’t like them, they won’t consider them.
Would-be applicants should talk to a broker about the schemes their accountant has suggested and ask how it will affect the mortgage they are likely to want in 12 months’ time.
The last thing lenders want is to be lending to someone based on fraudulent practices.
Laverne Hadaway is a freelance journalist
