Mastering Mortgages: Boost Your Chances as a Self-Employed Borrower!

November 25, 2024

0 4 minutes read

Mastering Mortgages: Boost Your Chances as a Self-Employed Borrower!

Being your own boss comes with a treasure trove of perks, but when it’s time to secure a mortgage, the road can get a bit bumpy. You’d think that self-employed individuals should be evaluated on their income just like their salaried peers, right? Well, not quite.

Whether you’re a lone wolf freelancer or the mastermind behind a limited company, if you’re self-employed, brace yourself for a bit of extra paperwork and scrutiny when applying for a mortgage.

Lenders crave stability, and the unpredictability that often comes with self-employment can give them pause. Unlike traditional employees who enjoy benefits like sick pay and pensions, self-employed individuals often don’t have that safety net. This can make lenders cautious.

“Lenders often approach self-employment with more caution because there can be significant variability in income,” explains Perry Graves, a mortgage advisor at Tembo. “There can be reliance on singular contracts to support the business and also a reliance on the health and wellbeing of the individual running the business.”

But wait! If you’re self-employed and eyeing that dream home, don’t throw in the towel just yet. There are smart strategies you can employ to enhance your chances of securing a mortgage.

First things first, aim for at least two years of solid accounts before you even think about applying for a mortgage. “[This] will enable you to access more borrowing options. Having one year’s history can be restrictive, and it is unlikely you will be able to access the best rates, but getting a mortgage approved may still be possible,” advises Graves.

Now, when it comes to documentation, the requirements can vary based on your self-employment status. Mark Humphrey, director at MHC Mortgages, specifies that sole traders usually need two years’ worth of accounts showcasing their net profit. If you’re a limited company director, lenders will want to see an average of your last two years’ salary and dividends or your salary combined with your share of the company’s net profit after tax. “This can be more beneficial where there’s retained profit in the business,” he notes.

And here’s a twist for contractors: “A handful of lenders have a unique policy that allows the use of your contracted daily rate instead of a two-year average. For instance, if you’re making £350 a day for 5 days a week across 46 weeks, that adds up to £80,500. Lenders often rely on your track record to ensure this income is likely to remain steady,” Humphrey adds.

So, how can you boost your chances of mortgage approval?

Plan Ahead
While you may need to wait a couple of years before applying, there are proactive steps you can take. “It’s never too early to explore your options and create a game plan, so consult a mortgage broker sooner rather than later,” suggests Humphrey. “This will help you assess your current situation and identify what steps are needed to get mortgage-ready, such as clearing debts or increasing your income during that waiting period.”

Generally speaking, the longer you’ve been self-employed, the smoother your mortgage application process should be. “Lenders are keen on longevity and consistent income,” says Mark Harris, Chief Executive of SPF Private Clients. “They’ll also scrutinize how your accounts have fared over the years—significant losses or gains could raise eyebrows.”

Consider Your Accountant and Accounts
Your accountant’s qualifications can play a crucial role in your mortgage application, especially if your financial situation is complex. “Verify your accountant’s credentials before working with them; lenders have specific qualifications they expect from your accountant. For instance, a bookkeeper may not meet the necessary standards, which could create hurdles during application,” warns Humphrey.

Ironically, even a great accountant might complicate your mortgage process. “Sometimes self-employed individuals face challenges because their accountant’s goal is to minimize tax liability, which may result in lower reported income. This can hinder your chances of obtaining a sizable mortgage, as lenders base their offers on the income you can prove,” Harris explains.

This holds especially true for limited company directors. “If you’re not drawing all the dividends you can for tax efficiency, it’s crucial to understand how that decision might affect your mortgage options,” Graves cautions. “What you save on taxes might end up costing you more if you need to rely on a more accommodating lender who considers the company’s net profits instead of your salary or dividends.”

Utilize a Broker
For self-employed individuals, enlisting a broker can be a game-changer. “If you approached 10 different lenders, you’d likely receive 10 distinct borrowing amounts, as each lender assesses you through a unique lens!” says Humphrey. “Using a broker can significantly streamline the process of finding the most suitable and competitively priced lender(s) for your needs.”

Most brokers can assist sole traders or single-business owners in finding the best mortgage options. However, Danny Belton from the Mortgage Advice Bureau points out that “if you have multiple businesses with various income streams, you may need a broker with more specialized knowledge to navigate the complexities.”

What Income Multiples Can You Borrow?
Experts agree that self-employed individuals can typically expect to borrow around 4.5 times their income. However, there’s a caveat. “This question is tricky due to the increasingly convoluted nature of lenders’ affordability calculators. Many lenders have shifted away from simply multiplying income to determine borrowing potential,” Graves explains. “You’ll notice some lenders offering specific income multiples between 4.5x-5.5x, but primarily for employed clients. While this may seem frustrating for the self-employed, it appears lenders are testing new strategies with employed applicants first.”

Fingers crossed, lenders will eventually start treating the self-employed with the same level of understanding and fairness as their regularly employed counterparts.