Applying for a mortgage while self employed used to be a very simple process. The applicant could simply state their self employed income and then the lender would trust that this was true. Sadly, the self-cert mortgage was widely abused and many people were using this system to apply for more money than they could afford.
In 2011, the self-cert mortgage was banned. The self-employed now have to work a lot harder to prove their income for a mortgage. While this might seem unfair, all of these changes were made to protect the self employed.
While business might be booming on month, the nature of freelance work is such that the following month could be a lot quieter. With sporadic income, you may find that your mortgage is easily affordable one month and a strain on your finances the next.
To protect freelancers and the self employed, lenders now carry out strict affordability checks to ensure that your mortgage payments will remain affordable. With this in mind, let’s look at how mortgage affordability is calculated and what you can do to make this work for you.
Most lenders will allow people to borrow between 4 times their annual income and 6 times their annual income. This will all depend on your individual circumstances. For example, newly qualified doctors may be able to access a higher multiple because their earnings are likely to increase a lot over the course of their professional life.
What many self employed individuals find unfair is that they will need to provide evidence of their accounts for the past few years. The lender may then take an average of these annual earnings to estimate your future earnings. Or they might take the lowest annual earnings as their final figure. Even if your earnings are consistently growing, lenders will be reluctant to estimate your future earnings.
If you have been self employed for less than one year, you will need to work a specialist mortgage broker to find a lender that will help you to get the best possible deal.
Most lenders will ask to see annual accounts from the past 2-3 years. This is often in the form of an SA302 form. This form is provided by HMRC and outlines your tax liability based on your self assessment tax return. If you work with an accountant, you could also ask them to prepare your accounts and confirm your income with your chosen lender.
When completing your self assessment tax return, it’s important to ensure that you are accurate and honest with your income. While you might want to minimise your tax bill, this annual income figure will be used to calculate how much you can borrow.
If you run a limited company, it’s important to find a mortgage provider that understands your income. Directors and partnerships will often have different income sources. This can include dividends and company retained profits.
All of these different income sources will need to be factored in to your affordability calculations. If you don’t work with the right lender, then you could end up being offered a multiple of your basic monthly salary instead of a multiple of your total income.
At Niche Mortgage Info, we connect individuals with the right mortgage broker for their needs. This website is a great place to start to find out more about self employed mortgages. And if you’re ready to start your journey, we can connect you with a broker who fully understands your needs.