Getting a mortgage as a freelancer

August 29, 2019
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Around 14.8% of the UK population is self-employed. With such a huge proportion of the population heading down the self-employed route, it’s important for mortgage providers to keep pace.

The self employed do not have simple and straightforward salaries, which can make it difficult for lenders to determine eligibility and calculate affordability. While it may be more complicated, more and more lenders are waking up to the idea that self-employed individuals are just as capable of paying back mortgages. If you’re a freelancer looking to get on the property ladder, read on to find out how to make this industry work for you.

How to get a freelancer mortgage

The important thing to remember is that there is no such thing as a “freelancer mortgage”. Instead, what you are looking for is a lender who will accept applications from freelancers. Once you have passed the application phase, the mortgage products are identical to salaried workers.

The easiest route to finding a mortgage provider who will accept your application is to speak to a specialist broker. We can help put you in touch with a mortgage broker who will be able to give you access to the full market, ensuring that you get the best possible deal.

Why is it harder for freelancers to get a mortgage?

Mortgage providers are primarily concerned with risk and affordability. If you can’t afford your mortgage repayments, then they might struggle to be able to recoup their money. This is why lenders ask borrowers to provide details of their income. For a salaried worker, this step is very simple. They simply provide their annual salary and then a breakdown of their monthly expenses. But for the self-employed, proving their income can be rather more difficult.

This is primarily because freelance income tends to fluctuate. You might earn a lot one month and not very much the next month. But over a whole year, you might earn more than your would in a 9-5 office job. To manage their risk, lenders will often ask to see multiple years of accounts for freelancers. This helps to offer some assurance than monthly fluctuations in income are not indicative of insecure income.

However, a rising number of specialist lenders mean that the industry is starting to catch up with new ways of working. While a traditional lender might ask for 3 years of accounts and a huge deposit, a growing number of lenders are relaxing these rules to make it easier for freelancers and the self-employed.

I’m a contractor, does this count as self-employed?

A huge problem faced by some workers is that their job isn’t clearly defined as ‘employed’ or ‘self-employed’. There is a grey for contractors which can make it difficult to get a mortgage. You could be self-employed, but only working for one client. In this case, should you apply as a freelancer or not? The simplest answer is this… if you take care of your own tax returns, then lenders will consider you to be self-employed. However, you may be able to use evidence of past contracts and contract renewals as further evidence of your income stability.

Few brokers have experience with freelancers

Not all brokers have experience working with freelancers, so it’s important to choose the right one. Whole of market means that they have access to all lenders, not that they have experience with all employment types. This is why it can be confusing for some freelancers.

Applying for a mortgage with the wrong lender can result in a rejected application. But don’t let this sway you. Another lender might be more than willing to work with you, so it makes sense to shop around and work with brokers who understand your needs. This is where Niche Mortgage Info comes in. We’re experienced in helping freelancers find the right broker for their needs.

How long do I need to be self-employed before I am eligible for a mortgage?

Lenders will take the length of time you have been running your own business as a key indicator of your financial stability. Many lenders will ask to see your accounts for the past 3 years, but some will consider 1-2 years. A very small number of lenders will be happy with 6 months of accounts.

If you have only recently switched to freelancing and you are experiencing fluctuating income, you may find it more difficult to secure a mortgage.

What if I form a partnership or limited company?

The way lenders calculate self employed income for mortgage applications will differ depending on whether you are a sole trader, limited company or partnership. For a sole trader, the majority will look at your net profit either before or after tax. For a limited company or partnership, the majority will look at your salary and dividends as proof of income. Some will also include your share of company retained profits to help boost your borrowing amount.

If you are self-employed as a sole trader, you will need to provide your SA302 forms as proof of annual income. If you form a limited company or partnership, you will need an accountant to provide evidence of your income.

What if I have a fixed term contract?

Some freelancers work on fixed term contracts, similar to that of salaried workers. Some lenders will accept this type of income, provided the contract has been renewed in the past or you have at least 6 months left on the contract.

If you have simply moved to a different working status but you have worked in similar roles in the past, lenders might be more willing to accept this as evidence of stable income. On a fixed term contract, your monthly income is more likely to be steady, which is an attractive feature for lenders.

How to calculate how much you can borrow

Once you have found a lender who is happy with your income and employment status, you will then need to work out how much you can afford to borrow.

Lenders will look at the following factors:

  • If you are a sole trader, lenders will look at your net profit, usually over the last 3 years. Some will take an average of the past 3 years and some will take the most recent year. 
  • If you are a limited company director, lenders will look at your salary and dividends as proof of income. Some lenders will also include your share of any retained profits, allowing you to borrow more.
  • If you are part of a contractor, lenders will either look at the contract value or the day rate. For a day rate calculation, they will calculate annual earnings by multiplying your day rate by 5 and then multiply this by the number of working weeks in a year.
  • If you are an employed worker, lenders will look at your basic salary plus any other forms of income. They might only accept a percentage of additional income, depending on how regular it is.

How is affordability calculated?

Affordability calculations are how lenders decide how much you can borrow. In general, it will be a multiple of your annual income. Some lenders will allow you to access 4x your annual income while others will lend you 6x your annual income. How you calculate income is therefore very important when determining how much you can borrow.

For example, a contractor with a day rate of £250 might be able to access between £230,000 and £345,000

How did we work this out?

Day Rate (£250) x 5 = £1250 x 46 (working weeks) = £57,500 annual salary.

4 x this salary would be £230,000 and 6 x this salary would be £345,000

This could mean the difference of £115,000 depending on which lender you approach.

Can I get a buy to let mortgage when freelancing?

Provided it is affordable, you should have no trouble securing a buy to let mortgage while freelancing. Some lenders will have minimum income requirements for buy to let mortgage which can range from £15,000 to £25,000. It can be more difficult for those on variable income to provide evidence that they meet this earnings threshold.

If you already own your own home, some lenders will consider you provided the rental income will be enough to cover the mortgage payments. If you don’t already own a property, then your application will be considered like any other mortgage application. You will not be able to use potential rental payments as proof of affordability.

This is because lenders are concerned that self employed borrowers would use a buy to let mortgage to sidestep the requirement to prove that a property is affordable. On the other hand, if you already have a portfolio of properties, it could be possible to secure a mortgage without providing any evidence of income.

Next steps

If you want to get on the property ladder as a self-employed individual, the first step is to get in touch with the right broker for your needs. We can help put you in touch with a wide range of brokers who are experienced in handling freelancer mortgage applications.

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