Mortgage help for the self-employed
According to the Office of National Statistics the number of workers categorised as self-employed has risen to its highest level in 40 years. Today around 4.6m people work for themselves in the UK, or 15 per cent of the total numbers employed, which compares with 13% of the workforce at the start of the financial crisis in 2008. These figures have led commentators to dub the UK the self-employment capital of Europe.
Given these numbers, and if true, it is worrying that such a large percentage of working people find it difficult to obtain homeloans.
So why is it more difficult to get a mortgage from conventional lenders if you are self-employed? A number of factors are involved:
- Self-certified mortgages have been outlawed following the introduction of new affordability criteria in the Mortgage Market Review (MMR).
- Increasingly complex mortgage underwriting processes are taking lending decision-making away from the front line making the whole process slow and cumbersome.
- Many of the newly self-employed are in fact struggling financially which is certainly concerning as it is the rise in self-employment that has been behind the drop in the UK’s jobless total since the credit crunch.
One of the first hurdles that a self-employed borrower faces is that of proving their income. Proving your income is straightforward if you are employed but if you are self-employed you may face a variety of rules in determining an income figure. Lenders will generally ask you to supply both your business accounts and an accountant’s reference, which usually needs to be prepared by a qualified accountant. The standard requirement from a lender is to see two or three years’ accounts. They initially assess profits from these and consider the sustainability of the business by asking about your future plans. They may also request a copy of your SA302 self-assessment tax return from HMRC to confirm any income received and tax paid.
Self-employed individuals can have good and bad years, for example they may sometimes invest more in the early years in the hope of increasing their returns in later ones. The work may be seasonal in nature; sometimes individuals leave money in their businesses, or their accountant may be using a variety of legal tax methods which will affect how their income status will appear to a lender. It follows that minimising the tax due on the business (in accordance with Generally Accepted Accounting Practice and entirely legal) naturally leads to declaring a lower income while the amount you are borrowing is dependent on the income you earn. As a result, arriving at a figure for income for the purpose of assessing how much you could borrow on a mortgage is complex.
The larger lenders may sometimes oversimplify matters for the purpose of filtering applicants to pass on to the next decision stage. Where the smaller building societies and some specialist lenders can and do outscore their larger counterparts is in the level of expertise that they can show in working through the true income of a self-employed borrower. This is done by reviewing all of the applicant’s financial information at the outset which leads to a truer reflection of affordability and a speedier and more efficient process from start to finish.
It’s worth bearing in mind that even if you are permanently employed with tax deducted by your employer, if you have other additional income, this may be classed as self-employed income. You could therefore also be treated in the same way as someone who is fully self-employed.
Partners in a business are also usually treated in much the same way as self-employed borrowers. Your share of net profit when calculating how much you can borrow will be critical. And if you’re a director of a limited company then your total income may be made up of a combination of basic salary and dividend payments. Lenders will usually consider both these elements of your income and apportion accordingly according to your share of the business.
In conclusion then, self-employed borrowers need to prove that the loan they are taking out is affordable, and arriving at a figure to show affordability can be a complex exercise. Lenders that have experienced underwriters and who are able to give quick decisions are those that are most likely to be the best first port of call. As a self-employed mortgage applicant, spending time gathering together as much evidence as possible will save you delays and heartache later on.
Amyn Fazal is chief executive of Penrith Building Society