The Covid-19 pandemic has caused an economic slump that has affected many business sectors. With businesses unable to work during lockdowns and demand reducing for many, mortgage lenders have reacted by tightening their lending criteria. For self-employed people, getting a mortgage has been more complex than employed mortgage customers for some time. In 2021 this is even more so.
However, it is still perfectly possible to get a mortgage as a self-employed person, you just need to be aware of current market requirements and how you can provide the right information.
What Self-Employed Mortgages are Available?
The first thing to understand is that there is no such thing as a ‘self-employed mortgage.’ However, different lenders have different criteria and requirements for self-employed people. There are nearly 4000 mortgage products on the market, serving many different needs and risk profiles. You can access many of them, the only difference; the details you will need to provide about your income and some commentary about your business in the current economic climate.
Increasingly, lenders are restricting loan to value (LTV) to 60% for self-employed applicants. However some, like Lloyds and TSB are still offering 75% for some mortgages. Loan-to-value is the amount you want to borrow as a percentage of the value of the property you are buying.
The other figure you need to consider is the loan-to-income ratio (LTI). This is the amount you can borrow based on your declared income. At present, most lenders are capping self-employed mortgages at 4.5 times income with some restricting to 4.25. So, if you declare an income of £40,000 you will be allowed to borrow £180,000.
Mortgage products with higher LTVs or LTIs will generally not be available to you as a self-employed customer.
What Qualifies as a Self-Employed Borrower?
If any of the following criteria apply to you, your application will be treated as a self-employed person even if you earn some of your income through PAYE:
· You own shares in a business that derives most of your income (normally minimum 20-25% share)
· You are a sole trader
· You are a contractor or freelancer working for more than one client
· You are a Director of a Limited Company
· You are a partner in a Partnership or Limited Company
· Sub-Contractors who invoice their employer
These will very from lender to lender, but this is a reasonable rule of thumb.
What Information You Will Need to Apply for a Self-Employed Mortgage
Your income information is key to allowing your lender to make an informed decision about your mortgage application. In the current climate, you will need at least two years’ income figures and in some cases three.
A sole trader will need to provide their income declared through HMRC self-assessment. This will be requested in the form of a SA302 form and your tax year overview. Some lenders may also require your SA100 form.
A partner will need to declare their individual share of profits generated by the business and a Director of a Limited Company will need to declare salary and dividend payments. If you retain profits in your business, bear in mind that some lenders do not count this as income, but some do.
If you are using an accountant to produce your accounts, many lenders provide a form that they can complete to provide all the information required for your application.
If you are considering changing the structure of your business e.g. you intend to convert your sole trader business into a Limited Company, it is worth delaying this if you are about to apply for a mortgage. Lenders prefer stability and may ask for more information or decide your business does not meet their 2-year trading criteria.
It is also likely that you will have to provide details of your last three months turnover. This clarifies your trading situation during the current pandemic.
You will also be asked several additional questions as part of your application. These include:
· What impact did lockdowns in 2020 have on your business?
· Was Government assistance applied for? If so, please provide details.
· What is the impact of the current lockdown and any future restrictions?
· If you have been working during lockdown, please explain how you have been able to do this.
· Explain how your bank statements support income declared for affordability purposes on your application
Given Covid, it is likely that the lender will analyse your accounts from previous years more closely to compare with your current trading position and ask for bank statements to show what your turnover has been like during the lockdown periods.
Please note that this is a general guide. Different lenders will request different types of information and set varying criteria for approving their mortgages. However, this is a good overview of the self-employed mortgage market in early 2021.
The Three Things That Will Help You Get Your Mortgage
There are three key things that will help you get a self-employed mortgage:
· A high deposit – you will almost certainly need between 25-40% deposit as a minimum but the more you can put down, the less risk the lender is taking
· A strong personal credit rating – a lender will factor this into their decision-making based on your record servicing other credit
· Comprehensive income information preferably supported by your accountant. By now, you should have read the previous section to understand what is required.
Why a Broker Can Help You Get a Self-Employed Mortgage
The one thing that can make a significant difference to securing your mortgage, other than those we listed above, is to employ a mortgage broker to help you. Here’s why:
Access to Widest Range of Lenders and Products
You cannot underestimate how much more a mortgage broker can offer you in terms of options. You simply could not find same the choices by spending days on end searching the internet. Brokers have access to mortgage products unavailable to the public, so can find the deal that best suits your needs.
Market Expertise
Brokers know how different lenders work. They know what information is most important to each lender and can anticipate challenges. This means they will get the right information from you first time. This support with your application will increase the likelihood of approval and save you a lot of precious time.
Independence
Whole of market mortgage brokers are not tied to any finance houses so can remain impartial, finding you the best mortgage to suit your needs.
36% of self-employed workers did not apply for a mortgage in the last five years, believing they would be rejected. However, mortgages for self-employed customers are still readily available. You should not be deterred simply because you are not employed. If you have a high deposit, a good credit history and can provide clear income data that meets the affordability criteria of the property you want to buy, you are very likely to be successful.
The key is to be realistic about your income levels and the properties you can afford. It is also important to make use of your accountant and a mortgage broker. They really could be the difference between getting your mortgage and not.
We are an independent financial advisor and mortgage advisor and can offer help researching and supporting you to get a mortgage.
