Self-employed mortgage advice

With early 5 million people in the UK classed as self-employed – and this number rising exponentially year on year – the mortgage market has had no choice but to better facilitate independent workers.

However, many banks and building societies are still more cautious about lending to contractors, freelancers and other self-employed individuals because they worry about the effects that inconsistent income streams and fluctuating demand can have on that person’s cashflow, and, crucially, their ability to meet their monthly mortgage repayments.

If you work for yourself and you are looking to purchase a home or remortgage your existing property, don’t panic. Mortgages for the self-employed are readily available – you just need to know where to look. And thankfully, we do.

The highly experienced mortgage advisors here at CLS Money specialise in helping sole traders, partners, limited company directors, agency workers and other self-sufficient individuals and their families find competitive deals that suit their circumstances perfectly, contact us today so we can help with your situation. Because we have access to the whole of the market, we can find and compare products from more niche providers who are more generous to the self-employed and who have a proven track record of lending to people in a similar trade or line of work to you. As well as explaining the range of options on offer from different lenders, we can also help you bring together all the paperwork you need for a successful application.

• What does ‘self-employed’ mean?
• Can I get a mortgage if I work for myself?
• Why won’t some mainstream lenders consider my application?
• How will lenders calculate my income?
• What other factors will lenders consider?
• How long do I need to be self-employed in order to get a mortgage?
• Can I get a mortgage with less than one year of accounts?
• How much of a deposit will I need?
• Can I get a Buy to Let (BTL) mortgage?
• How the process works, according to your setup
• Remortgages for the self-employed
• How can I improve my chances of being accepted for a mortgage?
• How is my credit score calculated?
• What if I have a history of adverse credit?
• How can I improve my credit score?
• Check your credit score
• Your self-employed mortgage checklist
• Speak with one of our experts

If you’re ready to make a purchase, and you want to get your head around what’s in store, read on for more information on the typical eligibility criteria for independent workers and an insight into what to expect from the mortgaging process if you are self-employed.

What does ‘self-employed’ mean?

If you run your business for yourself and you are prepared to take complete responsibility for its success or failure, you can define yourself as self-employed.

Many self-employed people are classed as sole traders by HMRC and registered as such. However, those who have entered into working partnerships, or who employee themselves within their own limited company, also fall into the self-employed category.

You may be a contractor – eg, work for a company or client on a short or fixed term basis – or you may work for an agency.

Can I get a mortgage if I work for myself?

Absolutely! Unless there are other factors at play, such as lack of income or a history of bad credit, but even then, we might be able to help you out, there is usually no reason why you cannot secure a mortgage.

However, an increasingly small number of lenders prefer not to release mortgages to self-employed people because they have concerns that their working arrangement is too unreliable or unpredictable.

It’s worth noting at this point that there’s no such thing as a ‘self-employed mortgage’, per se. As a self-employed person, you will be applying for the same mortgage products as somebody in full-time employment. The only difference is, you may need to go to greater lengths to prove that your income is stable and that you will have the means to settle your repayments. (The days of self-cert mortgages, which required little to no evidence of income and earnings, are well and truly over!)

Why won’t some mainstream lenders consider my application?

Many of the larger lenders will automatically turn away your self-employed mortgage application because they operate under extremely strict eligibility criteria. In these cases, they will be unwilling to lend to you because you have an unreliable income compared to somebody who is employed with no set end to their working contract – and therefore you are, in their eyes, a higher risk candidate.

Some High Street banks and mainstream building societies may be prepared to take a more flexible view on applications from self-employed people, but they will require solid evidence that there is suitable demand for your skills within your industry, and that, up until now you have been earning a consistent income as a independent professional.

How will lenders calculate my income?

This will depend largely on whether you are a sole trader, a partner within a business, or the owner and employee of your own limited company. We’ll go into the specifics of each situation a little later on.

Most mortgage providers will calculate your average yearly income based on your previous years’ accounts. They will then work out your maximum borrowing limit by multiplying this total by 4, 5 or perhaps even 6, depending on their own eligibility rules.

Here’s an example. Let’s say that in the last three years, you have earned £35,000, £42,000 and £37,000 respectively, and you have the accounts to prove it. Based on this, your average earnings would be £38,000. If your preferred lender works to multiples of 4, the maximum you would be able to borrow would be £152,000. If they are willing to stretch to an income multiple of 5, you could access up to £190,000 towards your purchase or remortgage.

This scenario assumes that your application has met other key eligibility criteria, such as debt to income, adverse credit and plenty of other factors, contact one of our mortgage advisors today and they will run through your available options.

We have got a quick video to explain how lenders look at different incomes, click here to watch!

What other factors will lenders consider?

You have the best chance of being approved for a home loan if you have a good credit score. This is the same regardless of whether you are employed or self-employed. A clean credit file proves that you can manage your money responsibly, which is understandably attractive to lenders; a record of credit accounts that have been settled on time and in full will stand you in good stead with most providers.

Other things that will affect your eligibility for a loan will include the type of property you wish to buy; the location of the property; and how much you have saved for the initial deposit (or how much equity you have in the property already, if you are remortgaging). Your age may also be a determining factor; for example, some companies may not wish to lend to those over the age of 65, or those who will be over 75 when their mortgage term is due to end.

You may have read that self-employed people within certain professions are more likely to get accepted for a mortgage. This simply isn’t true. Lenders will look at the overall viability of your business to determine your risk profile, not the industry you work within. It doesn’t matter if you are a plumber, a hairdresser, an IT specialist or a freelance marketing consultant – as long as you can prove that you are trading frequently and you are earning a sustainable income, your specialism is irrelevant.

If you are a contractor, the lender may need to see proof of existing or future agreements. They may also ask you to justify any significant periods of time between contracts in the last 12 months. You can learn more about mortgages for contractors by reading our dedicated page.

How long do I need to be self-employed in order to get a mortgage?

Lenders will be much more willing to consider your case if you can provide them with three years’ worth of accounts, and the accompanying SA302 forms displaying the total income you received and the tax you paid during this period if you are registered for self-assessment.

But if you have been trading for less than three financial years, don’t worry – you do have options. Some mortgage providers will consider applications from less established business that have been in existence for just 2 years. Your choices will be much more limited, but with the help of a professional mortgage broker, you will be able to find a company that offers mortgages for self-employed people without many years of accounts.

If trade has been strong in your most recent period of accounts, but it took a couple of years to get your business off the ground and therefore your earnings from previous years look less impressive, it may make more sense to approach a lender that will be happy to consider just one year’s worth of figures.

Can I get a mortgage with less than one year of accounts?

A select group of lenders will consider your case if you have been self-employed for less than a year. However, you will almost certainly need to get your books signed off by an accountant – and you will have to resign yourself to the fact there are very few of these kinds of products in the wider market, so the interest rates you do have access to may not be that competitive.

If you are considering applying for a mortgage or remortgage soon, and you are close to completing your first year of accounts, you can always apply to get your deal approved in principle, subject to your earnings being acceptable at the end of the full 12 month period. This would allow you to put an offer on a property before your first year of trading comes to an end, safe in the knowledge that you have a high chance of your application being accepted.

How much of a deposit will I need?

Most lenders will expect you to put down a deposit of at least 10%, regardless of your working situation. This represents a loan to value (LTV) of 90%. However, if you have less than three years’ accounts, or a history of adverse credit, your provider may require a larger lump sum upfront to counteract some of the risk.

At the other end of the scale, you may only need to raise 5% of the purchase price if you find a particularly flexible deal from a specialist self-employed mortgage provider, or if you buy your property using an initiative like the Help to Buy scheme.

Generally speaking, the higher your deposit, the better chance you have of securing a deal with more favourable rates and terms.

Can I get a Buy to Let (BTL) mortgage?

The short answer is, yes! You will of course need to meet the lender’s eligibility criteria in order to get a mortgage on an investment property – but this is often much more straightforward for self-employed people, because how much you earn is less of a concern.

Many lenders have removed the minimum income levels for Buy to Let loans. So, as long as you can prove that the income you receive from renting your BTL property will cover your mortgage repayments – give or take a few percentage points – you won’t need to disclose how much you earn (or expect to earn). The more experienced landlords amongst you will undoubtedly have access to better deals, too, because you can prove that your past investments have been successful and you have covered all repayments to date. To read more infomation about Buy to Lets or Let to Buys click either highlighted word and it will take you to our dedicated page.

How the process works, according to your setup

For sole traders and partners

According to standard sole trader mortgage criteria, the lender will calculate your borrowing limit by looking at either your net profit (if you are using accounts) or the total income you received (if you have supplied the relevant SA302s).

The company will work out your average earnings, then multiply this amount by the applicable income multiple to calculate how much they can offer you.

In most cases, you will need to present at least one year of accounts, preferably two or three, along with records of your expenses. You will also be asked for copies of your most recent bank statements, so the lender or the broker managing the application on your behalf can learn more about your financial commitments.

For limited company owners

Because limited company directors have a different income structure to sole traders and business partners, the income assessment process can be a little more complex.

Directors typically pay themselves a salary via the PAYE system, then draw their remaining earnings from the company in the form of dividends.

For tax efficiency purposes, most accountants would recommend that individuals in this position take a small salary that brings them up to the tax-free threshold, then take as little dividends as possible to avoid paying extra income tax and/or leave more capital in the business to reinvest in its growth. However, this does mean that, on paper, the director’s income could be significantly less than the company’s profits.

This is why limited company directors sometimes hit a stumbling block when applying for self-employed mortgages. Their income multiples are not always a true reflection of their company’s profitability. If the business has consistently made a profit of £300,000 in the last three years, but the director has only paid themselves £45,000 per annum, they will only be able to borrow 4 or 5 times the lower figure, restricting their future options considerably.

The good news is, many lenders are now willing to implement affordability-based assessments for limited company owners in place of these traditional income multiplication models. Using the example above, these lenders will consider the director’s income to be the full £300,000, which would broaden their horizons significantly in terms of the size and type of the property they can afford to purchase.

To prove your income when applying for a company director mortgage, you will normally need to supply your business and personal bank statements from the last three months. The lender may also want to see copies of your SA302s, or a reference from your accountant (or both). You will also need to supply copies of bank statements so the lender can scrutinise your outgoings.

Applying for a mortgage when your business has suffered a loss

If your business has made a loss in the last three years, most lenders will be concerned by your lack of income and will refuse to give you a home loan. So, the longer you can wait post-recovery before applying for a mortgage, the better.

If you suffered a loss more than three years ago and your profits have improved since, you are much more likely to be approved than if the dip happened more recently and you are still reporting negative figures.

Remortgages for the self-employed

As a self-employed individual, you will have access to the same remortgaging products as everyone else. But if you want to make sure your remortgage goes smoothly, you will need to be a little more thorough when it comes to proving your income, and you will need to make sure your financial affairs are in order prior to starting your search.

Make a note of when your current mortgage term is due to come to an end. Then, around three months before this date, ask your broker to source rates from different providers to see if you can save money on your monthly repayments. Before you commit to a switch, check with your existing lender to see if they can offer you more competitive rates, too – some are willing to let existing customers move to different product with lower interest.

If you want to remortgage your existing property to raise the funds to start or invest in a business, you may struggle to track down a lender who will consider your application. Most High Street banks will only consider releasing equity from a property in this way if it is intended to be used for clearing debt, making vital or substantial home improvements, or a large purchase such as a new car or a holiday of a lifetime. It’s not impossible to remortgage to raise capital, though. There are specialist mortgage providers out there who will consider these kinds of applications from homeowners with a low loan to value (LTV) of less than 85%. Let our team know if you need help in this area, and we will search the whole of the market to find a provider that allows this kind of remortgaging deal.

Finally, if you are currently employed but are thinking of working for yourself in the near future, try to avoid taking the plunge just before your existing term is up. As we mentioned earlier, you will find it much more difficult to secure a new mortgage or a remortgage with less than a year’s accounts, and you could run the risk of not being able to switch products or providers at all. This could leave you with no choice but to move onto your lender’s standard variable rate (SVR), and pay much more interest every month than you need to.

Click here to find out more about remortgages.

How can I improve my chances of being accepted for a mortgage?

Your application for a self-employed mortgage is more likely to be approved if:

• You have more than three years’ worth of accounts

• Your proof of income has been prepared by an accountant

• Your business has not been working at a loss in the last three years

• You have a sizeable deposit – at least 10% of the purchase price, but more if possible

• You have a good credit score, and no recent evidence of missed payments, CCJs, IVAs or any other credit issues

• You will still be under 75 when your mortgage term comes to an end

Satisfy all the above criteria, and you will likely have access to a wider variety of deals from a bigger network of lenders.

Better still, ask for help from one of our experienced self-employed mortgage advisors. They have unrivalled knowledge of the self-employed mortgage market and have successfully helped many sole traders, partners, limited company owners, contractors and freelancers secure a loan for their dream property.

They can even connect you with more specialist lenders if you are having trouble proving your income; if you have been trading for less than three years; or if your credit history is less than squeaky clean.

How is my credit score calculated?

Every individual, whether employed or self-employed, will be assigned credit scores from each of the three key credit agencies: Experian, Equifax and TransUnion. Click here to access your free credit report with all of the mentioned agencies.

These companies all use different indicators and sliding scales to assess your creditworthiness – but their main aim is to determine how ‘good’ you are with money, based on the records they hold from creditors who have dealt with you in the past. The higher your score, the better your credit rating.

These creditors will let the credit agencies know if you have ever missed a payment on account; been served a County Court Judgement (CCJ); entered into an individual voluntary arrangement (IVA); or been made bankrupt.

Defaults and other payment issues will show up on your credit report for up to 6 years. After this time, they will disappear, even if you are still midway through clearing one of your debts.

As you would expect, IVAs and bankruptcy will have a more significant impact on your credit score – but defaults on payments to phone companies and other utility providers can also bring your overall rating down, especially if they have taken place more recently.

What if I have a history of adverse credit?

Even if you have a profitable business and can prove your income, you may struggle to get a good mortgage deal (or any deal at all) from mainstream lenders if you have made financial mistakes. Providers will only offer you higher interest rates because you will pose a higher risk of non-payment than somebody with a flawless credit record.

The easiest way to improve your chances of getting a self-employed mortgage with adverse credit is to wait until these black marks on your credit file drop away.

If you can’t delay your purchase any longer, there are certain things you can do to clean up your credit file and improve your credit score.

How can I improve my credit score?

1. Review your existing reports

Get copies of your credit reports with Experian, Equifax and TransUnion, and go through them with a fine-tooth comb to make sure all the information they contain is correct. If you spot a mistake, rectify it as soon as possible by contacting the creditor or the credit agency and asking them to investigate the error for you.

2. Register to vote

Lenders will check the address on your mortgage application against the address on the electoral roll. If they are the same, it confirms your place of residency and ticks another box in terms of the provider’s eligibility criteria.

3. Ask brokers and lenders to perform ‘soft’ credit searches

If you have an adverse credit history to begin with, you don’t want to weaken it further by applying for multiple ‘hard’ credit checks while you’re trying to secure a mortgage. Always ask your mortgage broker or potential lender to carry out quotation searches instead of full credit searches wherever possible, as these will not leave a record on your credit file.

4. Settle as many of your debts as you can

We know it’s easier said than done, but the more debts you can clear, the better. Doing so will prove to the lender that you are serious about sorting out your finances – and getting rid of a few monthly payments will greatly improve your debt-to-income ratio, which may be used during your affordability assessment to calculate how much money you can afford to put towards your monthly mortgage repayments.

5. Save a bigger deposit

The more equity you can purchase straightaway, the less you’ll need to borrow. Saving just an extra 5% towards your new property could open your search up to a larger range of products and providers.

6. If you have no credit history, start using credit responsibly

You might struggle to access a good mortgage deal if you have no credit history whatsoever. This is because the lender will not be able to gauge your reliability based on past events; in layman’s terms, they will have nothing to go on, so will assume you are a medium or high risk candidate.

To build up a healthy credit profile, you can use a credit card for your everyday spending in the months leading up to your mortgage application – but make sure you always pay the balance off in full at the end of the month, with no exceptions! You can also just take out credit card, and not use it, this will show that you have available credit in your name. Click here to watch our video on improving your credit score!

Check your credit score

Checking your credit score and report is key to obtaining a mortgage. Why? Because it provide us with a complete in-depth and up-to-date breakdown of your current credit situation, allowing us to pinpoint specific lenders, who’s criteria will mould around your credit profile, taking into consideration the credit score, along with the exact date, type of credit and amount for each default, CCJ and/or arrears. In addition to this, it can also uncover any unknown issues affecting your score, which can prohibit you from moving forward with your financial future.

There are three main credit agencies that lenders use, Experian, Equifax and TransUnion. Each credit agency could have different information showing therefore we have teamed up with Check My File. They not only offer a free 30 day trial but they also have all 3 agencies showing on the one report which means any issues affecting your credit rating can be easily picked up by one of our mortgage advisors.

Provide us with a credit report today, and uncover the issues that could be affecting your credit score! Click here to access your free credit report with the three top credit agencies all in one report!

Your self-employed mortgage checklist

Here’s what you need to do to secure the best possible mortgage deal if you’re a sole trader, you’re in a partnership or you’re working for your own limited company:

• Talk to one of our specialist self-employed mortgage brokers. We understand the unique challenges you’re facing and can help manage the application from start to finish

• Make sure you have been trading for at least 12 months – preferably three years

• Gather proof of income in the form of bank statements, filed company accounts and/or SA302s

• Limit unnecessary spending in the months leading up to your application, and use this time to settle any outstanding debts

• Save a deposit of at least 10% of the purchase price – preferably more

• Check your credit history and take steps to improve your credit score if you need to

At CLS Money, we have a great track record in helping self-employed individuals find and secure the right mortgage.

With many years’ experience in finding and securing mortgages for self-employed people, our brokers will quickly be able to advise you on your options, then source a suitable product from a provider with more accommodating eligibility criteria.

It’s our job to take the hassle out of the mortgaging or remortgaging process. We’ll help you cut through the jargon, identify what you need for a winning application, and collect all the necessary paperwork according to your lender’s requirements. We can also liaise with other third parties, including accountants and solicitors, leaving you more time to focus on running your business during what could otherwise be a stressful and frustrating time.

We’ve made it easier than ever for you to fit your search for your ideal mortgage around your work and family life, too. We offer appointments any time between 8am and 8pm, even on weekends.

Contact us now to book your free, no-obligation chat and start generating quotes for your self-employed mortgage today!