Posted on 1st May 2015

The Self-employed and the Mortgage Market


Martin Williamson, Head of Residential Property

More people are currently self-employed than ever before and they are frequently referred to as the main drivers of the UK economy. Such is their contribution to UK Plc that David Cameron described small business owners as "national heroes in a conference speech.

According to the Office for National Statistics, the number of Brits who are self-employed is at the highest level in four decades. There are now some 4.6m people working for themselves, 15 per cent of the UK workforce.

However, many self-employed people, just like those in the 60-plus age bracket, have traditionally found it almost impossible to get a mortgage.

Tough lending criteria, introduced last year, has made a tricky situation even more challenging, with many lenders asking to see three years of accounts.

It means those who decided to go it alone after being made redundant, or having re-evaluated their career, during the financial crisis, are facing difficulties when it comes to buying a home, or trying to remortgage for home improvements.

Then, theres the definition of what self-employed is to a lender. While you may feel youre in perfectly secure employment, a lender may well count you as self-employed even if you own just five per cent of your companys shareholding.

Most lenders have separate criteria for applicants who are sole traders, limited company owners or limited liability partners.

Theres no doubt then, that jumping through the hoops required to get a mortgage if youre self-employed is difficult, but it is do-able.

A number of major, and specialist, providers have started to consider applicants with only one year of accounts. Its likely, however, that you will need a bigger minimum deposit and will face higher interest rates than those available for employees with long-term contracts. Generally, the highest loan-to-value you can expect if youre self-employed is 75 per cent.

No matter what size your business is and, even if you feel youre capable of doing your own accounts, it pays to employ an accountant when planning your house purchase, as lenders are much more likely to accept accounts from a certified or chartered accountant.

Even individuals with tremendously successful businesses are being rejected for loans simply because of poor record-keeping.

Some lenders will take into account retained profits, which remain in the business, but others will not. So, it could be a good idea to make sure you are paying yourself a regular monthly salary.

While it goes against the grain for those who are self-employed and want to legally minimise earnings to pay less tax, if youre trying to borrow, it makes sense to do the opposite, at least for the three years your accounts will come under scrutiny for.

Reducing your income will reduce the amount you can borrow, so the best strategy is to increase the amount you declare to the tax man.

Also, while its understandable to concentrate on your business accounts, dont forget that your personal bank accounts will be closely examined too. As well as maximising the taxable income you declare, cutting down on your personal spending is wise to secure the best mortgage deal possible, getting rid of any unnecessary standing orders or direct debits.

Self-employment brings with it a whole host of advantages, but easily securing a mortgage is usually not one of them. By making sure you have all your personal and professional accounts in order, you can give yourself the best chance of convincing a lender that youre a safe bet.

For further information contact Martin Williamson: 01325 341500