According to the Office for National Statistics, the percentage of self-employed workers in the UK almost doubled between 1975 and 2014. In 2014 15% of UK workers were classed as self-employed. These workers all need somewhere to live and many of them will need a self employed mortgage. The good news is that self-employed workers can still get mortgages. They may just find it more of a challenge to prove that they can afford them.
The Mortgage Market Review and what it means for the self employed
In simple terms, the Mortgage Market Review aimed to ensure that borrowers actually could afford to repay their mortgages. As of April 2014, when it came into effect, lenders have been obliged to work to a set of “affordability” criteria. In short, they need to look at a borrower’s overall circumstances, rather than just their current income, to see if they can realistically afford to repay the mortgage. In practice this means looking at how potential borrowers have managed their finances up to that point, looking at their current situation, and looking at their future prospects. In principle all these criteria are applied equally to everyone, whether employed or self-employed. In practice self-employed mortgage hunters face a particular set of challenges which, fortunately, can be overcome.
Income – a taxing question
Lenders are going to need to see evidence of a potential borrower’s income. The self-employed should be prepared to show at least 2 years’ worth of verifiable accounts, ideally prepared by an accountant. Some lenders may accept 1 year. A good accountant may have suggested ways of legally reducing your taxable income, for example by investing profits back into your company. Some lenders may accept this as a case of standard business practice. Others, however, may simply look at the headline figures. This kind of situation is one where investing some time in getting professional financial advice from a qualified financial adviser can prove very helpful.
Showing evidence of financial responsibility
Getting into the savings habit early can have all sorts of benefits for the family finance and your personal wealth. One of them is that being able to put down a decent deposit is a huge plus when applying for a mortgage. The more you can put down, the happier lenders will be. Another key point is having a good credit history. You can request a copy of your credit history from each of the three main agencies (Equifax, Experian and Call-Credit). In addition to checking it for simple mistakes (which can be corrected), it’s also worth looking for potential sticking points. Delays to customers paying invoices, for example, can lead to late payments being noted on your credit file. You will need to take a decision on whether you can reasonably explain these late payments (and what you’ve done to stop them happening in future) or if it would be better to wait until they drop off your file in due course.
Looking to the future
Mortgages are long-term loans. This means that lenders are going to be looking for evidence that you will be able to manage repayments not just this year or next year but ten or twenty years down the line. Of course, nobody has a crystal ball, but it is entirely possible that lenders will ask for some sort of reassurance that your business has long-term prospects. With that in mind, some lenders may request that you provide proof of future work.
Summing it all up
It’s still perfectly possible for self-employed people to be accepted for mortgages but you should expect your application to be examined in detail. You should therefore be prepared to provide plenty of evidence of your previous financial responsibility, your current income, and your future prospects. You may also need to think about the pros and cons of legally reducing your taxable income as this may make you less attractive to mortgage lenders.
YOUR PROEPRTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE