Self-Employed Mortgages: A Guide to Securing Your Home

Securing a mortgage while self-employed requires careful planning. Self-employed individuals make up a significant portion of the UK's workforce, at just over 13% in 2021 according to government sources. While the path to a self-employed mortgage can seem strewn with obstacles, there are routes to success with the right preparation and guidance. 

Obtaining a mortgage while self-employed can be challenging, but possible. A key element is the lender's confidence in your financial stability and the sustainability of your self-employment. By demonstrating a track record of consistent earnings, a solid business plan and a realistic projection of future income, self-employed individuals can position themselves as reliable borrowers in the eyes of lenders.

Key Requirements

Lenders typically want to see a strong trading history, with supporting accounts and tax returns; a healthy deposit; and evidence of any additional savings and investments. They may ask for at least two years of accounts and tax returns, and evidence of upcoming work, which can be a contract if you are a freelancer, or a projection of future dividends if you are a company director. This is on top of routine documents such as your passport or driving licence required to prove your identity and utility or council tax bill to prove your address. Additionally, some lenders may require a higher deposit or credit score from self-employed borrowers to offset the perceived higher risk.

Mortgage Options for the Self-Employed

Various mortgage products are available for the self-employed, ranging from those offered by high-street banks to specialist lenders catering to those with unique financial profiles. The best lenders for self-employed individuals are often those that will look favorably on your particular circumstances and are flexible in their criteria.

1. High Street Banks: Some traditional mortgage lenders, such as Halifax, NatWest, Nationwide and Santander, are known to offer mortgages to self-employed borrowers, but they may have stricter requirements, such as a minimum of two years of accounts and tax returns, and a higher deposit compared to someone in employment.

2. Specialist Lenders: Some lenders specialize in mortgages for the self-employed, particularly for those with more complex income structures or shorter trading histories. These lenders often provide more flexibility in their underwriting criteria but may charge higher interest rates to offset the perceived higher risk.

3. Buy-to-Let Mortgages: If you are investing in property to rent out, buy-to-let mortgages for the self-employed are an option. Lenders will consider the property's rental income potential and will usually require a minimum personal income as well. The deposit requirements for buy-to-let mortgages can be higher than for owner occupied mortgages, with a deposit of 35% or more not unusual.

4. Flexible Mortgage Products: Some lenders offer more flexible payment terms, allowing overpayments or payment holidays, which can benefit those with variable self-employed incomes.

5. Guarantor Mortgages: A guarantor mortgage allows a family member or friend to act as a guarantor for your loan, which can sometimes increase the amount you can borrow. This will depend on the guarantor’s income and financial commitments, and the lender’s assessment of these.  

Preparing a Strong Application

Preparing a strong application is important. Strategies to fortify your application include:

• Saving for the largest deposit possible

• Enhancing your credit score
• Having a healthy portfolio of investments

This ensures that the lender views your financial profile as robust and reliable. A mortgage broker specializing in dealing with self-employed applicants can offer invaluable assistance, providing access to a range of suitable deals and helping navigate the application process.

Improving your chances of securing a mortgage when you are self-employed involves a multi-faceted approach. It is not just about presenting the numbers; it is also about showcasing your reliability and financial health in a way that puts lenders at ease. Here are some strategies that might prove to be effective:

Save for a Larger Deposit: The more you can save for a deposit, the better your mortgage options. A larger deposit reduces the lender's risk and can grant you access to more competitive mortgage rates. Aim for at least a 15% deposit but strive for 20% or more. For buy-to-let mortgages, a minimum deposit of 25% might be required, with a desirable deposit of 35% or higher.  

Boost Your Credit Score: A high credit score can make a significant difference. Ensure you are on the electoral roll, pay off outstanding debts and use credit responsibly. Regularly check your credit report for any errors and correct them.

Keep Accurate Accounts: Presenting accurate accounts is crucial when you are self-employed. This not only reflects your income, but also your business's financial health over at least two years. Having your accounts prepared by an accountant can give lenders more confidence in the reliability of your financial information.

Prepare Required Documentation: Gather all necessary documents, such as accounts, tax returns, SA302 forms from HMRC, bank statements, proof of upcoming work, investment portfolio statements, life insurance policies and anything else that substantiates your income and financial stability. You will also need proof of identity (passport or driving licence) and address (council tax or utility bill).

Consult a Mortgage Broker: A broker who understands the self-employed market can guide you to lenders who are more likely to approve your application, potentially saving time and improving your chances. They can also help you find the best rates and deals available.

The self-employed mortgage market has diverse options, but it can be navigated. By preparing thoroughly, consulting with professionals and targeting lenders who understand self-employment, you can improve the chances of securing a mortgage.

The recent removal of mandatory interest rate stress tests by the Bank of England may have opened more doors for self-employed borrowers, making it easier to qualify for a mortgage compared to previous years. However, lenders are still required to assess borrowers’ ability to afford mortgage payments under responsible lending rules that apply to the conduct of mortgage business and a robust application remains crucial.

With the right preparation and guidance, the goal of homeownership for the self-employed is possible to achieve.

FAQS:

Q. Can I get a mortgage if I am self-employed?

A. Yes, you can get a mortgage if you are self-employed. Lenders will most likely look at your trading history, accounts, tax returns, projected income, and savings and investments. Having a larger deposit and a good credit score can also help your case.

Q. What are the challenges of getting a self-employed mortgage?

A. The main challenges include proving a consistent and stable income, the need for at least two years of strong accounts and tax returns, and possibly a larger deposit compared to employed applicants. Fluctuating income and doubts about business viability can also pose challenges.

Q. What are the requirements for a self-employed mortgage?

A. Lenders may ask for at least two years of accounts and tax returns, and evidence of upcoming work. This is on top of routine documents such as your passport or driving licence to prove your identity and utility or council tax bill to prove your address. Additionally, some lenders may require a higher deposit or credit score from self-employed borrowers to offset the perceived higher risk.

Q. What options do I have for self-employed mortgages?

A. Self-employed borrowers have several options, including mortgages from high street banks and specialist lenders. Buy to let mortgages and flexible mortgage products are also available. The best option will depend on your specific financial situation and business profile.