How to get a mortgage when you’re self-employed

Looking to get on the property ladder? You might be put off by the commonly held belief that getting a mortgage when you’re self-employed is almost impossible. Don’t believe a word of it!

The truth is that being self-employed does not make mortgage lenders any less likely to approve your application than if you were employed – you just have to be a little bit more organised in your approach to managing your finances.

There’s no such thing as a self-employed mortgage!

Whether you’re employed or self-employed makes no difference to the range of mortgage products that you’re entitled to in the UK. Lenders just need to know about your ability to repay; having a contracted salary from an employer is a great way to demonstrate this but there are plenty of other ways to prove that you’re good for the money if you run your own business.

A lot of the confusion surrounding the concept of “self-employed mortgages” comes from the abolition of self-certification mortgage back in 2014.

What were self-certification mortgages?

Self-certification mortgages, or self-cert mortgages, enabled people to borrow money to buy a home without having to prove their income. Instead, applicants simply told the lender what they earned without the need for any proof to back it up – can you guess what’s coming?

These types of mortgages were originally aimed at a minority of self-employed borrowers who generally found it difficult to prove their income, but they ended up being sold much more widely. Dishonest borrowers would exaggerate their income in order to secure a bigger mortgage with minimal checks and as a result, self-cert mortgages quickly earned the nickname “liar loans”.

Unsurprisingly, the Financial Conduct Authority (FCA) outlawed self-certification mortgages in 2014, making it more difficult – but certainly not impossible – for self-employed people to secure a mortgage.

Getting a mortgage: employed vs. self-employed

Mortgage lenders are required by law to be confident that anyone they approve for a mortgage has the ability to repay. It’s up to you, the borrower, to prove that you’re likely to be able to keep up with repayments and – for better or worse – this can be a little bit easier to do if you’re employed.

Employed borrowers

Employees generally have a contracted salary with their employer and, through PAYE, they can produce payslips and P60s to prove their income relatively easily. Lenders can use this evidence to confidently work out how much income the borrower will have to contribute towards their mortgage repayments.

From the employee’s perspective, the PAYE system is automated: at the end of the month, tax is deducted from their salary and the rest is individual profit. This is a very neat and tidy way for the mortgage lender to draw a conclusion about how much money the employee will be able to pay back.

Self-employed borrowers

If you’re self-employed, keeping your finances neat and tidy and working out profit accurately is a little bit more complicated. With various taxes, expenses, bills, invoices, dividends, and much more on top of all that, it can be difficult to prove to a lender that the money you earn would be enough to cover mortgage repayments.

Organisation is key and if you’re considering buying a house in the near future it’s never too early to start looking for a better way of organising your accounts and pre-empting the questions that lenders might ask about your income.

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Case study: Andy Brown’s experience of getting a mortgage as a self-employed videographer

“Applying for a mortgage was a lengthy, time-heavy process. I needed to provide layer upon layer of information to get my application considered. I’m not sure what it’s like for a non-freelancer or someone in full-time employment but for me as a freelancer the time it took was considerable.

“The most important forms were the SA302s from HMRC. Most lenders seem to require at least the last three years of SA302s. Then you’ve got the usual stuff: a couple of different bills from last three months and ID. I also had to fill out a monthly expenditure form – which was insightful on a personal level!

“The most time-consuming thing for my initial mortgage application was being on the phone to HMRC to request the SA302 forms [the form which evidences your earnings based on information from your Self Assessment tax returns]. This was before HMRC’s website overhaul so I was in phone queue after phone queue to speak to someone to request paper copies. This actually delayed my mortgage application but I got there in the end.

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