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Securing a mortgage can be challenging for anyone but can be particularly so for the self-employed. Due to the nature of their income, lenders often perceive them as high-risk. With the number of self-employed individuals in the UK increasing steadily. It's more important than ever to understand how one can secure a mortgage on a freelance income. This blog aims to dispel some myths and offer valuable advice.
General Mortgage Eligibility Criteria for the Self-Employed
The first step in securing a mortgage is understanding what lenders look for:
1. Income Proof: Lenders may ask for at least two years' worth of finalised company accounts (Limited company) and/or SA302 (Tax Calculations) and corresponding Tax Year Overviews.
2. Credit Score: A healthy credit score is crucial, as it reassures lenders you are a reliable borrower.
3. Deposit: The larger the deposit, the better the mortgage deal you can secure. Minimum deposit required is 5%.
The Importance of Accurate Bookkeeping
Maintaining accurate, up-to-date records is paramount. Not only will this help you come tax season, but it will also simplify the mortgage application process. Make sure your accounts are certified by a chartered accountant to ensure their validity when you present them to mortgage lenders. As Sole Trader you can also submit your own Tax Return, but you need to make sure it is all done correctly.
Types of Mortgages Available:
• Fixed-Rate: Your interest rate remains constant for a set number of years.
• Variable Rate: The interest rate can fluctuate based on market conditions.
How Lenders Assess Your Affordability
The criteria may vary among lenders, but they look at:
• Net Profit: If you are a Sole Trader.
• Salary and Dividends: For directors of limited companies.
• Retained Profit after Corporation Tax: some lenders will accept it along with director’s salary.
Strategies to Improve Your Mortgage Prospects
1. Reduce Your Debt: Try to minimise other financial commitments as much as possible before applying.
2. Don’t avoid paying tax: the higher tax you pay the more income you can use for affordability and as a result you can borrow more.
3. Use a Mortgage Broker: An independent mortgage broker can find you deals that are tailored specifically for the self-employed.
4. Compare a whole of market: Not all lenders assess self-employed applicants in the same way. This is where your Mortgage Broker will find the most suitable deal.
Common Pitfalls to Avoid
• Changing Legal Structure: Try not to change from being a sole trader to a limited company too close to your application. Most of lenders require 2 years in the same Legal Structure.
• Drawing Minimal Income: While it may reduce your tax liability, it can also impact your mortgage affordability.
While getting a mortgage when self-employed may come with its challenges, it's far from impossible. Proper planning, robust financial records, and advice from professionals can go a long way in turning your dreams into reality.
For mortgage advice, consider speaking to one of NEST's mortgage advisors who are well-versed in the intricacies of securing mortgages for self-employed individuals.
Think carefully before securing debts against your property. Your home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
