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Self-Employed Frequently Asked Questions
Listen below as Michael Webb talks all about mortgages for Self-Employed Mortgage.
In 30 minutes, you’ll know a lot more about getting your first mortgage sorted.
All about self-employed mortgages with Michael Webb.
Is it harder to get a mortgage if you are self-employed?
The process is no more difficult. Over the twenty years that I’ve done this, self-employed mortgages have always required different kinds of documents and different underwriting to some extent.
Lenders have different risk profiles, because the income isn’t guaranteed when you’re self-employed. Your business has to continue to perform – so whilst it’s not typically harder, there is a different process.
We do find, however, that some self-employed people can make it more difficult for themselves with ‘creative accounting’. They can end up with official documents that don’t match their true position. If that’s something self-employed individuals are doing then they may find it harder to borrow at the level that they’re hoping for.
Can I get a mortgage if I only have one year’s accounts?
As long as you have been trading for one year, then yes you can still get a mortgage, subject to underwriting criteria and credit scores and all of the usual things.
The thing to bear in mind is if you are a sole trader you need to have been trading for a full tax year. The tax year runs from April to April, so if you started trading in October you’ll only have half a year – even though you’ve had to do a tax return. In that instance, you’re likely to have to trade for a year and a half before you’ve got a full year’s accounts to use to get a mortgage.
Are self cert mortgages still available?
They disappeared a long time ago. They’re a distant memory. FCA regulations put an end to self cert mortgages over a decade ago now.
It was around 2010 or even before that – 2008 perhaps – that you could find a self cert mortgage in the marketplace. There’s absolutely no reason now for someone not to be able to prove their income. It’s very easy in the electronic world to get the documents that lenders ask for.
In the media, self cert mortgages were branded ‘liar loans’ because people were inflating their income to borrow more than they could afford. That had an impact on the last recession and the credit crunch because people over extended themselves.
So there are good reasons why these mortgages aren’t around. But if you are self-employed, speak to a broker who’ll be able to advise you on what you can borrow and which documents you need to provide.
Can you get a joint mortgage if one person is self-employed?
Yes, it’s just the same as for two people who are employed. The individual that’s self-employed will need to provide tax and accounting documents and the employed individual will need payslips and a P60. But this is very common.
Is Buy to Let available for the self-employed?
Yes, Buy to Let is accessible to the self-employed. Typically, again, you’re going to need at least one year’s accounts. Just like in the residential mortgage market – there will be some lenders that ask applicants to have two or three years trading as self-employed. Other lenders will require a minimum income from that self-employment.
Where lenders do set a minimum income, which is typically £25,000, that’s what the self-employed individual’s taxable income will need to be if they’re alone on the application.
We’ve just talked about joint applicants and that is applicable with Buy to Let as well.
The other thing to bear in mind is that whether you’re self-employed or employed, with Buy to Let you will have to do a tax return to declare your rental income. It’s fairly common for self-employed people to invest into property, and increasingly those who own limited companies invest in property because they can move profits over to another limited company without being taxed.
That’s a whole different episode – but it’s a way you can use company profits as a deposit. If Buy to Let is something that you’re looking to investigate, get in touch.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
What is the difference with mortgages between someone who is self-employed and a limited company director?
Let’s start with how HMRC sees them. A self-employed individual is usually a sole trader – although they may still employ people. Legally, they’re legally a sole trader. Any profit earned is taxable under that individual’s own tax code. Some sole traders are VAT registered but the final profits of that company are taxed on the individual’s own tax code.
A limited company is limited by liability as a separate legal entity. Mortgage Republic is a limited company that is a separate legal entity to Michael Webb. People do this because it puts the liabilities of the company separate to that of the directors. It limits the risk that the directors have.
The company will make a profit and pay corporation tax at the relevant rate. Then, net of that corporation tax the directors will take a drawing. Typically, accountants will advise directors to take a PAYE salary at a very low rate, that does not incur any national insurance for either the company or the individual director. Then the rest of the salary and earnings will be taken from the limited company in the form of dividends.
When we’re looking at mortgages for these two types of entities, a sole trader will have tax calculations, referred to by some people as SA302 documents. The profit from self-employment will be stated on the SA302 .
That same tax calculation is needed for a limited company director, and states PAYE earnings drawings from dividends. If it’s a very successful limited company the director may not be drawing an income that matches the profit. The company may be retaining earnings because the director doesn’t want to exceed the upper threshold for tax.
A few lenders will therefore look at the director’s share of retained profit, rather than the dividends taken. They look at what the company actually made as profit plus the PAYE which obviously came off before the profit figure was established, and after corporation tax.
There are some complexities but it shows you that certain things that can be done with limited companies that can’t be done with self-employed people. But the income figure is usually clearer with the self-employed.
How does remortgaging work for the self-employed?
The process is exactly the same as getting a mortgage, but it’s an area where self-employed people need to be careful – more so than employed people. What we often see is that someone’s self-employed accounts will have some very good years leading up to buying a house.
Then they’ll get their property, and particularly if they’re a limited company, they’ll decide to take lower drawings. They’ve got the property and don’t need the money so much. Then we come to remortgage and find that their earnings are no longer enough.
It’s a risk – the lenders see that. You’re reliant on a business continuing to perform for your earnings to remain static or grow. Typically people that are employed see an upward trend in their earnings over the years. So when remortgaging, we need to make sure your income and outgoings remain on an upwards train, so you can continue borrowing at the same level.
Otherwise you can find yourself trapped as a ‘mortgage prisoner’ where the only option is to renegotiate with your own lender and not all lenders offer a product switch. So you could end up on their standard variable rate.
Think carefully before securing other debts against your home.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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How much can a self-employed person borrow?
Unless we’re talking about a lender that would take one year’s accounts, most will average out the last two or three years’ performance from your tax calculation or net profit from your business.
That’s how it works if your profit is increasing. If it is decreasing, they will take the lowest year. This is the main difference from someone on a PAYE salary – lenders see that as guaranteed to continue at that level.
Lenders have different affordability calculators. Some are harsher on the self-employed. Certain lenders work out the average only take 80% of that, to allow for fallback in trade. We’re seeing a little bit of that as the economy gets tougher.
Generally the number used will multiply up to calculate the mortgage total in the same way as for an employed individual. That’s why it’s really important to speak to a mortgage broker who knows what they’re doing with self-employed individuals. If the wrong number goes into a calculator, you’ll get the wrong answer. It could mean you will have wasted time because the lender you’ve approached won’t offer you enough money.
What documents do I need when applying for a self-employed mortgage?
There are some key dates for the self-employed. The last day in January each year is the date you need to file your tax return. Lots of self-employed individuals leave it until January to do it. But it will become increasingly difficult to get a mortgage past the first of October if you haven’t done your tax return.
You start to lose lenders in the market because it means it’s over 18 months since the last figures were returned. You can actually do your tax return from any date after the 7th of April so do it as quickly as possible. The tax bill still doesn’t need to be paid until January, but at least then the tax return is in and you have up to date, relevant figures.
In terms of documents you need your last three years’ SA302 tax calculations and your last three years’ tax summary overviews. These can all be downloaded from the online HMRC portal by yourself or your accountant.
Lenders then ask for your last three to six months business bank statements and personal bank statements – and potentially any other evidence on how you’re managing your accounts.
If you’re a limited company director you need those tax calculations and tax summary overviews as well. You’re also going to need your last three years of your limited company accounts. They are typically done by an accountant. Again you need three to six months business bank statements and personal bank statements.
So do keep those documents in good order, make sure that they’re returned on time, and are downloaded and ready to go.
What else should we consider for self-employed mortgages?
The earlier you speak to a mortgage broker the better. It may well be a year or two years before you’re intending to do anything.
For example, you may be considering investing some money from your business to buy something. But that will really impact your profit. Perhaps it’s something that could be left for a couple of years until you’ve bought your house. By talking to a mortgage broker you will understand how much income you need to achieve from your business to buy the kind of property you want.
I’m very careful when I say that – we’re not trying to manipulate your accounting situation. This is a planning situation. For example, if you know you need to have a net profit of £50,000 and you’re running at £35,000, you might need to increase your prices or find a certain amount of new customers over the next two years to reach those numbers.
That gives you a business plan and growth goals moving forward. It can be worked in line with your accountant and your broker. Obviously everything is subject to change when we look at lenders, but there’s planning that can be done.
That’s much better than coming with a 10% deposit, having found a £300,000 house, but your net profit says you made £17,000 last year. That doesn’t add up. You may need a couple of years working on improving the overall profitability of your business, #by decreasing costs and increasing turnover.
Your home may be repossessed if you do not keep up with your mortgage repayments.