Getting a Mortgage If You are Self Employed

The purpose of this video is just to give a few hints and tips for the self-employed wanting to get a mortgage, what hoops you need to jump through and what kind of information you need to present.

So a bit of a boring statistic first, but by the end of 2019, the Office of National Statistics showed that there were more than 5 million people that were classed as self-employed. And this is up from 3.2 million people in the year 2000. The number of self-employed people that are either self-employed in the terms of a sole trader or as a Partner or as a Director of their own Limited Company, but they represent 15.3% of total employment throughout the UK.

So why is it a pain in the bum to get a mortgage for self-employed people?

It mainly stems from the mortgage companies being a bit more nervous about the income stream of the self-employed. So it might fluctuate month to month, it might fluctuate year to year. So basically, they really want to get much more evidence of what your income is, in order to support any mortgage applications.

Here are the types of information you may get asked for going for a mortgage.

Ideally two to three years of accounts, ideally certified by an accountant.

They prefer Chartered Accountants or certified accountants, not these Management Accountants. No, no, no. So chartered or certified accountant to sign off your annual accounts. And those annual accounts are what are used for your tax return. Then they would like the SA 302, and the tax year overview for the corresponding year, so the last two or three years,

What is an sc 302?

Well, that’s the calculation you get out of the HMRC system. Or if you use an accountant and they use commercial software, it’s the tax calculation that comes from their software, there is a separate video in the knowledge base on how to get hold of your sa 302.

Depending on the industry you’re in, they might want a possible projection of your income. And that could be a case of looking at any up and coming contracts, or work, you know, you’ve definitely secured or carried on before you are next to file your tax return. Now, for musicians and singers, potentially you get these contracts quite in advance, so you have a reasonable idea of what money might be coming in. They also require some form of identity documents, and it’s always at least one with a photo on it, and one with your address on it.

So with the photo, it would be things like a passport, or driving licence or something with an address on it’s probably a council tax bill or utility bill, bank statements. credit card statements are now not really in vogue. So a lot of the time now they won’t take credit card statements. Now who gets a utility bill now, I think most of its online. But there are options with some utility companies that if you click a button to say you need a bill for referencing purposes, they will actually print an invoice and post it to you.

Some Mortgage Brokers require three to six months’ worth of bank statements. It could be business bank statements, it could be personal bank statements. So if they are two different bank accounts, which I hope they are, then you might have to provide two different bank account statements.

Mortgage Affordability

The next thing that they will actually do is they will look at whether you can afford the mortgage, it’s all very well saying you’ve got some lovely accounts, etc, etc. But you might have really high personal expenditure. So they’ll look at things like what does it cost to run your household. Obviously, it will be different if you’re going to mortgage because then you won’t be paying rent or you might remortgage for a lower mortgage cost. So that will vary. The things like your utility bills, other household bills like Council Tax insurance, if you go out socialising, if you have hobbies, go on holiday, childcare, any travel you might want to do, even just to get into an employed job. And yes, you can have a mortgage as a self-employed person as well as having an employed job. It just makes the form a bit more complicated.

So look at what you spend your money on and see what’s leftover as to whether you can afford the mortgage. Now, the job of an accountant is to help you reduce legally your tax bill. So what you’ll find is that your accountant will put through all the costs of your business, because then it will lower your profitability, and lower the income tax. But that might not be a good move if you’re getting a mortgage. Because a lower profit means less for the multiple to happen in order to substantiate your mortgage.

When you do start to think about mortgages, think about it a year or two, before you plan to get one, and then start to look at, if I don’t claim all my expenses, then what would the tax bill be? And what would it give me for a mortgage multiple.

Mortgage Brokers will look at if you have any PAYE income. If it’s a tiny amount, they will just discount that, they will look at your self-employed profit before any taxes are taken off. So that would be your fee income, or your turnover, less your allowable expenses and less your capital allowances. So if you’re gone and spent lots of money on capital equipment, then you’ll do your capital outs going through either at 100% if you can as a first-year allowance, or 18%, or 6% going through. So it’s always the figure that’s on the tax return and that will be self-employed profit.

Now one thing to point out is that lenders’ criteria can different can differ between Lender A and Lender B. So I would always check the eligibility for whichever mortgage company you’re looking at, because they might have different terms. And they might take different things into account when getting your mortgage.

Remember, just because you might get turned down by one mortgage company, doesn’t necessarily mean you’ll get turned down by all mortgage companies. So just a quick word on if you operate through your own limited company. Technically, you’re not self-employed because you are employed by your company. And of course, you do have a payroll scheme going through, don’t you? That’s subject to a different video, we won’t go into that now. So the lender will take into account the salary you pay yourself even if it’s just the minimal salary and dividends that you have paid yourself as to whether those dividends have a sustainability factor.

Some lenders will also take into account the profits held in the company. If you don’t take all the dividends. That is something you might want to check with a mortgage broker first as to which companies do take into account your profitability and retained profits in the company. You don’t particularly want to pay yourself a £50,000 pounds dividend if you don’t need to & you don’t need the money, or you’ll be paying income tax on it in your personal tax return, if they will take the profitability into account of your limited company. So always check that.

Now, there are ways obviously, that COVID has come in bite people & lenders are tightening up on their criteria and it can be harder to secure a mortgage as a self-employed person.

What I have experienced when I’ve done some forms for mortgage brokers for my clients, they have often been turned down by the mortgage broker because they took into account the SEISS grant. So check out whether that is a criteria in one of their lending briefs. It is looked on by case by case process. It might be a case if you have enough self-employed income before the SEISS grant for them to be satisfied that actually, you know this is a good risk we can offer this person a mortgage.

Again, a mortgage broker should or hopefully would know which lenders are turning down people so as not to waste time and money going through to them.

Now there are ways you can improve your chances of getting a mortgage, which always helps. Make sure you have your numbers ready and make sure you’ve got up-to-date numbers. Often people won’t look at anything that’s more than 18 months old. So don’t leave your tax return to the last minute in January, because then that can really put off mortgage brokers and mortgage companies from actually treating you seriously in wanting to get a mortgage. So get your numbers ready, get your tax return filed, especially if it shows an increase in profit, and also have already what your current year income is and what your expenses are.

If they asked you for projection, you’ve actually got it there and they’re waiting, you can work on improving your credit score, I’m not a credit score expert, you’ll have to search how you can do that. Potentially, you can save for a bigger deposit, which will then mean that you’re not having a 100% mortgage or a 95% mortgage, or even a 90% mortgage. If you’ve got a bigger deposit, then that will always help the eligibility and what people are willing to lend you.

 

Employ the services of a specialist broker, some brokers actually specialise in a certain niche industry, they might know of the best mortgage companies to get self-employed mortgages from, but it would be a really good idea if you got a broker, especially if you are newly self-employed because you have no real credit history, you might have PAYE income, and then only one year of self-employment.

Also, get yourself an accountant to certify the accounts in advance. You might even think about a couple of years before you want to have a mortgage, getting an accountant to do your tax return. They’ve got the data there and they can certify it. Yes, accountants can go back to certify prior years by looking through your tax return & looking through your backup information, etc. But if they find there are problems with that tax return, it’s already been filed. Potentially there’s nothing they can do about it. So you might be claiming expenses you shouldn’t be claiming for etc. Or you might decide actually, I don’t really want to claim for those expenses. It’s a bit of a grey area.

So let’s take a look at it, the tax returns have already been filed. So you can go in and open it up to a year later and refile it, but sometimes it raises a red flag with HMRC. So use an accountant to certify them either before and get them correct before it goes into HMRC or an accountant to review everything in order to certify the accounts when you’re ready. I’m not a broker, I’m not a financial advisor. So this is just from an accountant’s perspective.

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