The landscape of employment in the UK is shifting, with more individuals embracing self-employment than ever before. The gig economy is thriving, facilitated by technology that enables freelancing for clients across the globe. However, a perceived obstacle on this journey of personal work freedom is securing a mortgage.
Hold on a moment – obtaining finance for a home purchase while not in traditional full-time employment has become significantly more accessible in recent years. The catalyst? Banks, building societies, and private finance companies have caught wind of the changing tides, driven by data from the Office of National Statistics indicating a whopping 1.5 million self-employed individuals in the UK today.
Granted, securing a self-employed mortgage (also known as a contractor mortgage) involves a bit more paperwork, but the silver lining is that the effort can yield worthwhile results in the end. The path to homeownership is evolving, and the doors are opening wider for those navigating the world of self-employment.
What kind of mortgage should I go for?
You can go for the same type of mortgage as a full-time employee. That means interest-only repayment, capped, tracker-based and fixed rate deals are all available to you. In the past there was only one finance product a self-employed individual could apply for (self-certification mortgage) but that was scrapped back in 2011, meaning today’s self-employed mortgage market has widened considerably. Not all high street banks are attuned to the changing work norms though; the most obliging we’ve found are The Halifax and HSBC.
What you need to apply
As you would imagine, proof of earnings is mandatory. This should be for the past two or three years with your accounts prepared - and signed-off - by a certified or chartered accountant. And on this note, it’s worthwhile informing your accountant you intend to apply for a mortgage since there are means of writing-off expenses and investing profits which in turn could lower your income on paper (you want it to be as high as possible in order to obtain as much of a mortgage as possible).
Similarly, if you’ve had a bad year for earnings then hold off until the situation picks up again. This way you can prove to a potential lender that the occasion wasn’t a downward trend for your business, but that there was a particular reason for the drop in earnings.
Improve your chances for a self-employed mortgage
- Save up to be able to put down a big deposit (10 to 25 per cent of the total valuation cost is best). That way you’ll need to borrow less and you’ll benefit from a better interest rate. It also shows the lender you can be sensible with your money.
- Make sure your credit record is up-to-date and as good as possible (a quick fix could be paying off any outstanding credit cards etc, if possible). It can be worth using a credit reference agency for this.
- Make sure you’re on the electoral register to vote.
- Keep your income as stable as possible from year to year.
- Work as much as you can in the previous year to when you apply for a mortgage. That means cutting back on holidays. This way a lender can see you have plenty of work to access when you want.
- Show the lender evidence of future earnings i.e. a letter from a client confirming they have contracted you for a following 12 months etc.
- The longer you’re in business for, the better the chance of your getting a mortgage (especially if your income has remained stable or increased over time).
- Provide detailed HMRC records in the form of annual SA302 self-assessment forms. These will highlight your net income before tax.
- If your current freelance business is one in which you were previously employed full-time, then let the potential lender know this. This will make them more confident of your ability to not just do the job, but also pick up clients quicker since you’ll already know how to approach them.
- If you’re applying to remortgage then make sure your existing mortgage payments are up-to-date and regular.
- If you have a partner then it might be worth considering buying jointly - especially if he or she is in full time employment.
Why approach a specialist mortgage broker?
A broker who specialises in self-employment or contractor mortgages (i.e. applications from people in non-traditional set-ups) will be familiar with the best products on the market for you at that particular time.
He or she may, for instance, approach lenders who are happy to consider share options and company dividends, as well as your net income.
Not only will they pinpoint products, they will also be able to guide you as you feel your way through what has become an increasingly complicated mortgage application market.
Another advantage of using a broker is that they will be able to advise you on additional fees that come hand-in-hand with a mortgage. This includes arrangement fees, valuation fees, legal fees, stamp duty (for non-first time buyers) and broker fees. This can all extend to thousands of additional pounds.
And finally, the more mortgage applications you put in and are rejected for, the less likely you are to get a future mortgage (that’s because the rejection is noted on your credit file). Using a broker means you’ll get expert advice on tailoring your application for the best possible outcome.
PropertyHeads have teamed up with One 77 Mortgages – a leading UK mortgage broker – to find the right mortgage deal for our self-employed members without charging you a fee. Our experts are comparing dozens of mortgage deals available to the self-employed from across the market and are available seven days a week to provide advice without obligation. Click here to visit our mortgages page.
Why does it often feel as if you have to jump through hoops?
You’re not. Even those who are in full-time employment for large corporate firms have to be as scrupulous as possible when it comes to filling in a mortgage application. Since the 2007 recession banks and building societies have had to adhere to regulations by the Financial Conduct Authority which toughened up lending laws. Today’s stringent mortgage procedures are as a result of this.
Basically what lenders want to know is that you can afford to make the mortgage repayments, that your business is stable, the sector you work in can be considered ‘secure’ and that they themselves are not going to lose out financially in the long run.
Added: October 1, 2018 10:50:04
