Getting a mortgage when you’re self-employed


Date: 26 February 2020

A self-employed couple apply for and are granted a mortgage based on their circumstances.

As a start-up owner or entrepreneur, if you’re thinking of applying for a mortgage, your biggest concern will be that your application is accepted by your chosen lender. It’s easy to think that lenders will only be concerned with whether you can afford to pay back a mortgage loan, and whether you’ve had financial difficulties in the past that might make you a bad risk (that is, you have a poor credit history).

While these factors are indeed key to lenders’ decisions, they are not the whole picture. Lenders will also take other information about you into account, including your employment status - particularly whether you are self-employed.

However even this isn’t straightforward, as not every lender will treat your employment status in the same way, and it’s sometimes difficult to determine whether a lender will treat you as self-employed.

Having a broad understanding of how lenders will view your employment status could help you to apply to the right lender and improve the chances of having your mortgage application accepted.

Why does employment status matter?

Working as an employee gives you certain advantages when it comes to applying for a mortgage. For a start you will usually have a steady income. You might occasionally receive bonus or overtime payments, but in general you will have a standard basic rate of pay, which you can prove with payslips, that will demonstrate to lenders your ability to meet your mortgage repayments.

In addition, if you are a permanent employee you will have a contract of employment that not only also confirms your salary, but also shows that this income is pretty much guaranteed for the foreseeable future.

For the self-employed, things are a bit different. No payslips mean no easy way to prove how much you earn, and working for yourself can be notoriously insecure. In other words, it may be trickier for you to prove both the level and the stability of your income.

How HMRC defines employment status

While HMRC provides a handy guide to who is probably considered self-employed, this isn’t a foolproof way of assessing whether that is the way a mortgage lender will view you. The concern for HMRC is, understandably, ensuring that you pay all the tax that you are liable for on your income. So, for them, defining your employment status is a means to achieving this end.

However, you can use this to give you guidance, and if you are paying your income tax via Self-Assessment, rather than through PAYE, the chances are lenders will consider you to be self-employed.

Is it different for company directors?

First things first - for most mortgage lenders, whether or not they treat a company director as self-employed is initially determined by how much of the company the director owns. If your holding in the company is more than around 20% to 25%, then the likelihood you will be considered to be self-employed.

However you may also be paid a salary as an employee of the company of which you are a director, as well as receiving dividends from your company. You may also want a lender to take into account any profits you have retained in the business.

If this is your situation, you should make sure that any lender understands the added complexity of how you receive your income.

If you also work as an employee

You don’t have to be a company director to also receive part of your income as an employee. Many people, particularly during the early years of being self-employed or starting a limited company, also work for another company, receiving a salary and paying tax via PAYE.

How a lender will treat you really will depend on how much of your income you get from each route. If, for example, you work as a teacher employed in a school, but also carry out some private work as a self-employed tutor, the chances are a lender will consider you to be an employee.

This doesn’t mean that they will disregard the income that you earn as a tutor, though, so you should make sure that your application shows all the money you have coming in.

Can I work out if I’m self-employed before I apply?

Mortgages applications are very individual affairs. You may be able to get an idea of how likely you are to be accepted by checking your credit score or calculating how much disposable income you have, but you still may be surprised by lenders’ decisions.

You can use Simply Lending Solutions self employed mortgage calculator to get an idea of how a lender will view you.

Other ways to maximise your chances of success

Rather than trying to apply for a mortgage independently, speaking to a mortgage broker who specialises in self-employed mortgages could give you the edge. A broker who covers the whole mortgage market will understand the differing criteria of different lenders - giving you the best possible chance of applying to a lender whose products best match your circumstances.

A broker will also help you to accurately represent all of your income, from all sources, as well as advise you on the most effective way to prove your self-employed income to lenders.

Whether you consider yourself an entrepreneur, contractor or a freelancer; whether you are a sole trader or a company director, knowing how lenders see you is essential for taking the first steps in a successful mortgage application.

Copyright 2020. Article was made possible by site supporter Simply Lending Solutions

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