Since the end of the self-certification mortgage, the self-employed have had a harder time securing mortgages. This can be heartbreaking for those keen to get on the property ladder, buy their first home, or diversify their income with a rental property. According to a recent study by The Mortgage Lender, as many as 71% of freelancers said that they felt discriminated against for being self-employed.
It could be that the UK mortgage market has an image problem. One in four surveyed said that they had been put off looking for a mortgage because they assumed it would be more difficult. It’s clear that there is no shortage of horror stories about the loops company owners have to jump through in order to get on the property ladder.
In reality, there are plenty of mortgage providers who are willing to work with the self-employed. Those who are rejected by one mortgage provider would be wise to continue their search, as not all providers treat the self-employed the same way. Shopping around could be all that is needed to beat the perception that self-employed mortgages are difficult to come by.
The biggest obstacle to securing a mortgage as a freelancer or self-employed individuals is proving your earnings. While a full-time employee can simply show their job contract and pay slips, the self-employed need to provide around two-year’s worth of accounts. In some cases, the owner of a limited company might have a harder time securing a mortgage than one of their own employees.
Those looking for a mortgage might not be aware that many high street lenders regularly work with the self-employed. And as this sector of the economy grows, they are seeing this as more of an incentive to consider applications from the self-employed. In the case of sole traders who can show a steady increase in their net profit, Santander and Coventry Building Society are both great options. Both will look at your most recent year of earnings, rather than taking an average of all, which can significantly impact how much you can borrow.
Limited company traders typically fare better with the likes of HSBC and Virgin Money. Both lenders will consider your salary and your share of net profit, rather than looking solely at dividends. For those with 100% shareholdings, the options become even brighter as most lenders will look favourably on this situation.
One of the biggest problems freelancers and the self-employed face is proving their income. A common myth is that prospective borrowers will need a full 24-month’s worth of accounts to be able to apply. In reality, there are plenty of lenders that will work with self-employed individuals who have only been trading for one year.
Kent Reliance, Aldermore Bank, Kensington, Vida Homeloans and Precise Mortgages will all consider borrowers in these circumstances. Every case is considered on an individual basis, and your trading history is only one part of the picture. Lenders will also look at the size of the deposit, credit history and affordability.
Unfortunately, the self-employed are still considered higher risk, as their earnings can fluctuate more than those with a steady salary. However, some will see this as a benefit, particularly if you can show that your net profit is increasing year-on-year. For this reason, many self-employed mortgages will incur a higher interest rate. It’s still worth shopping around, as every mortgage provider will treat lenders different.
With self-employment on the rise and more people choosing to become their own boss, it makes sense that the mortgage industry is trying to catch up. While it might not be as easy as it was in the days of the self-certification mortgage, where borrowers could just state their earnings without providing any evidence, the mortgage industry is heading in the right direction. There still needs to be a balance between responsible lending and fair treatment of freelancers.
What’s important is that lending is fair and responsible, as no one wants to see another market collapse as the result of irresponsible lending. The good news for freelancers and the self-employed is that mortgage providers are starting to catch on. There will always be mortgage brokers that specialise in working with the self-employed, but the high street banks are also starting to keep pace which is making the industry more competitive.
If you’re a freelancer and thinking about getting a mortgage in your first year of trading, the best thing to do is to shop around and speak to many different mortgage providers. Work on building a strong credit score, clear your short-term debts and focus on saving for a larger deposit. It might not be equal footing with salaried workers just yet, but the good news is that the market is heading in the right direction. Shop around and don’t take a single rejection as a sign that you cannot secure a mortgage.
