The number of people in self-employment is currently higher than at any point in the last 40 years. The Office of National Statistics currently states that 15% of the UK’s workforce is self-employed – that’s 4.8 million people working for themselves, compared to 3.3 million back in 2001.
Market research from Aldermore Bank PLC, which shows that currently 29% of British workers, almost one in three, are planning to become self-employed in the future, with more women looking to make this change than men, it also highlights just how big the self-employment sector currently is and also how much we can expect to see it grow in popularity over the coming years.
More than 50% of people who have made the move to self-employed are now earning more money than in their previous employed role and one in three expect this to increase in the next 12 months. However, when it comes to mortgage lending, self-employed people can sometimes find it difficult to secure the level of mortgage that they require, but this need not be the case.
Below, we take a look at how lending criteria has changed and give advice on how to secure a mortgage if you are self-employed.
How lending criteria has changed
The Mortgage Market Review (MMR) which was launched on 26th April 2014, whereby the Financial Conduct Authority (FCA) required lenders to place more emphasis on a client’s overall outgoings and the affordability of their monthly mortgage payments.
Self-certification mortgages have also been removed from the mortgage market, meaning lenders were no longer willing to just accept the borrower’s word on their income levels and resulted in many lenders refusing to offer a loan if they felt that the client had not been trading for long enough, irrespective of previous experience and/or employment within the same industry prior to switching to self-employed status.
The FSA’s thinking is certainly reflected in the perception of the general public.
40% of those in self-employment believe that their ability to borrow is restricted due to their status.
Three steps to securing a mortgage when self-employed:
Get your Tax Calculation and Tax Year Overview documents
If you’re self-employed, in most instances you will be asked to present 3 years’ worth of audited accounts or Tax Calculations and Tax Year Overviews.
The Tax Calculations and Tax Year Overviews are downloadable documents available via the HMRC website. The Tax Calculation is now the preferred name for the SA302.
The Tax Calculation shows your income for the year, your personal allowance and the resultant tax bill on the year. Whilst the Tax Year Overview is a statement of your tax bill for the tax year, the tax paid and any amount outstanding.
In the case of a contract worker, many lenders will require 2 years history of contracting, along with at least 6 months remaining on your current contract. Without these, your mortgage application could be denied so it is imperative that you have your documentation in order as it could not only cause delays in the house purchase or re-mortgage process, but more importantly it could adversely affect your ability to borrow from another lender – failed mortgage applications can have a negative effect on credit file and credit scoring.
Collate your income information
When you apply for a mortgage, you will be asked to go through a mortgage interview. You will need to have all your income figures ready in advance of your meeting.
The audited accounts, Tax Year Overviews and Tax Calculations will provide confirmation of such figures as your company profit, tax paid and other areas that lenders will base their lending decision on. In addition you may be asked to provide copies of contracts or formal offers as evidence of stability of your future income.
Seek professional mortgage advice
There is no substitute for the support of a professional mortgage adviser. Curchods Mortgage Services can explain everything to you, prepare and submit your mortgage application and research the whole of the mortgage market in order to find the right deal for you and your particular financial circumstances.
Download your free Mortgage Application Checklist
Case Study: Securing a mortgage for newly self-employed client
Mr & Mrs F had started their search for a property without firstly taking financial advice from anyone, unaware that their current employment status would have a greater impact on their ability to obtain a mortgage than they had realised.
Mrs F: Teacher employed for 5 years
As a teacher, Mrs F had been employed in her current role for the past 5 years, with a stable basic income that was easily evidenced through monthly payslips.
Mr F: Newly self-employed IT consultant
Having worked for the past 10 years for a multi-national company in the IT industry, he had gained a vast level of knowledge and experience that he felt could now be best utilised by changing his employment status from employed to a self-employed contractor.
His plan was to secure 6 month contracts with various companies, charging a day rate that would result in not only an increase in his income, compared to that which he had received under his previous employed status, but it would also enable him to take back more control of his work/life balance.
Lender wouldn’t grant mortgage with only 3 years accounts
With a solid history of employment behind him and prospects looking good within the industry, Mr F saw no reason why his bank would not look favourably upon their situation. Unfortunately this was not the case.
Instead of looking at the contract that Mr F had secured previously and the new 6 month contract that he had lined up to start in the next 3 months, the bank requested that he provide them with 3 years proof of audited accounts or Tax Calculations and Tax Year Overviews, on which figures they would base the lending.
Of course Mr F was unable to provide such figures as he had only changed to being a contractor 3 months prior to applying for the mortgage. On that basis, the amount that the bank was willing to lend was considerably less than was needed to allow the couple to purchase a mortgage.
Using a mortgage adviser to access the whole of the mortgage market
It was at this point that Mr & Mrs F decided to discuss their predicament with the Estate Agent that was dealing with the property sale and were put in contact with Curchods Mortgage Services.
After an initial conversation with a Curchods Mortgage Adviser, whereby Mr & Mrs F were able to explain their situation and the consultant was able to gain a greater understanding of Mr F’s previous employment, experience in the industry and details of the new contract that he had recently secured, the task was to find and secure a lender that would look favourably on the couples situation.
By being able to access the whole of the mortgage market the consultant spoke with both ‘high street’ and specialist ‘self-employed’ mortgage lenders.
After a consultation with the potential lender Curchods Mortgage Services secured an agreement with the lender that based on the high number of years’ experience working in the IT industry, that Mr F could indeed meet the mortgage repayments with the lending criteria. This was based on a multiple of his daily rate shown on his current contract paired with Mrs F’s employed income.
The result was a successful mortgage application and offer and a swift exchange of contracts with a moving in date confirmed!
How can Curchods Mortgage Services help me get a mortgage?
Whilst securing lending for self-employed clients can in some instances prove slightly more challenging with some lenders, this most certainly is not the case with all.
As the case study above shows, by simply speaking to an expert mortgage adviser who is able to research the whole of the mortgage market and thereby approach a number of lenders on your behalf, it is indeed the best way to secure the most competitive mortgage products available to you, no matter what your employment status.
The self-employed should not feel that they are being disadvantaged by their entrepreneurial drive and ambitions to go it alone, but if you are experiencing any issues securing a mortgage application or would like some advice, please feel free to contact Curchods Mortgage Services team and they will be more than happy to help.
You don’t have to buy or sell through Curchods to use Curchods Mortgage Services to arrange your mortgage. 50% of the mortgages we arrange are for people not buying or selling through Curchods.