Self-Employed Mortgage

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.