A standard query prevails among the self-employed in personal finance – can they secure a mortgage? Home ownership has long been held as a quintessential milestone of financial success and stability. However, misconceptions and outdated beliefs often deter individuals, primarily the self-employed, from pursuing this dream.
What does the research say?
Recent industry research highlights that over 40% of UK residents who have faced rejection for a mortgage grapple with feelings of embarrassment and failure. Experts suggest that perceived “failure” is more likely tied to the advice received rather than one’s actions.
Challenging myths and misinformation is crucial, as approximately 35% believe they are ineligible or need more income to secure a mortgage. Furthermore, 33% find the mortgage application process and associated advice to be more relaxed and relaxed. Consequently, a substantial number of potential homeowners inadvertently eliminate themselves from consideration.
How does the UK look from a self-employed point of view?
Within the UK, a vast pool of approximately 4.8 million self-employed individuals exists. Unfortunately, many erroneously assume that their irregular income or absence of a three-year accounts history automatically disqualifies them from mortgage eligibility. This assumption, however, is incorrect.
This article delves into the core aspects of mortgage eligibility for the self-employed, covering essential requirements, steps to improve mortgage prospects, necessary documentation, earnings evaluation, and the types of mortgages available. By addressing these aspects comprehensively, individuals can make informed decisions and navigate the mortgage landscape effectively.
Exploring Mortgage Eligibility for the Self-Employed
To ascertain mortgage eligibility, individuals must comprehend the fundamental prerequisites for a successful application. The information crucial for a compelling application resides within financial accounts and credit reports, accessible to brokers with proper authorisation.
In general, mortgage applicants are expected to verify their identity, address history, and the source of the deposit and provide bank statements upon request. A good starting point is ensuring financial preparedness, commencing with the promise, typically amounting to 5% of the total home price. Beyond the warranty, specific requirements vary based on the business structure.
Sole Traders
Minimum of one year’s finalised accounts or SA302 from HMRC less than 18 months old. Lenders consider the sole trader’s net profit.
Partnerships
Minimum of one year’s finalised accounts or SA302 from HMRC less than 18 months old. Lenders evaluate a partner’s share of the partnership’s net profit.
Limited Companies
Income calculated from salary, dividends, or a combination. Most lenders average the last two years’ income.
Contractors/Freelancers
Current daily rate annualised over the year. A 12-month track record is ideal, but securing a mortgage on the first contract is possible, demonstrating industry experience.
Umbrella Services and CIS
Ideally, 12 months of payslips are required, although a lender may consider three months of industry experience.
Enhancing Mortgage Prospects for the Self-Employed
Securing a mortgage involves more than presenting financial figures. Lenders evaluate various factors to make informed decisions. For self-employed individuals, optimising their mortgage chances entails the following steps.
Consult a Broker
Seek advice from a broker to match with the most suitable lender, considering their unique criteria.
Review Credit File
Ensure a clean credit record, correcting adverse entries to enhance credit scores.
Address Electoral Roll
Confirm the registration on the electoral roll with the local council to bolster credit scores.
Maintain Updated Accounts
Ensure all accounts are current and paid on time, reflecting responsible financial management.
Manage Debt and Payments
Minimise credit card usage, avoid payday loans and make more than minimum payments to display financial stability.
Plan and Prepare Deposit
Strategise and prepare the deposit well in advance, considering family contributions and consulting with an accountant when using business funds.
Gather Necessary Documentation
Organise all essential documents required for the application process.
Understanding Earnings and Affordability
The self-employed often grapple with understanding how lenders calculate their earnings and determine affordability. Lenders typically analyse net profits for sole traders and freelancers while considering salary, dividends, or share of net profit for limited company setups.
Contractors’ annualised day rate is also a crucial factor. Affordability calculations, often facilitated through an ‘affordability calculator,’ weigh various aspects such as lifestyle spending, commitments, and dependents to ascertain a suitable mortgage amount.
Types of Mortgages for the Self-Employed
In the mortgage market, self-employed individuals can choose from various options tailored to their circumstances.
Fixed Rate Mortgages
Maintaining a consistent interest rate over a specified period, providing financial stability.
Tracker Mortgages
Interest rates linked to the Bank of England base rate, adjusting instantly as rates change.
Complete Repayment Mortgages
Monthly payments consist of interest and capital, ensuring full repayment by the end of the term.
Interest-Only Mortgages
Monthly payments cover only interest, necessitating alternative repayment strategies for the original amount.
Overcoming Common Hurdles
While the path to obtaining a mortgage as a self-employed individual may seem challenging, a few common hurdles can be effectively addressed:
Insufficient Accounts History
One of the primary hurdles is having only one year of accounts, while many lenders require two or three years. Specialised lenders can accommodate cases with fewer years of charges or significant income increases.
Navigating the Mortgage Landscape with Expertise
In pursuing mortgage approval, individuals may encounter rejections due to various factors, necessitating a deeper understanding of their circumstances. Seeking guidance from independent mortgage advisers is pivotal in identifying the right lender and addressing shortcomings.
Your Mortgage Solution
Discover the true extent of your potential in the mortgage landscape by exploring advice and information from various sources. Reach out to professionals in the field and embark on your journey toward realising homeownership aspirations.
