Taking the leap from working for someone to being your own boss is exciting, scary, exhilarating, nerve-wracking, invigorating…all the emotions you can comprehend. Finally, being in control of your own income and own livelihood, to some people, gives you a sense of freedom and accomplishment that you can’t always get from being employed.
Getting A Mortgage When Self-Employed
When it comes to getting a mortgage, being self-employed can either be a blessing or a curse depending on who you have to help you and how your self-employment is structured. Without these two integral elements getting a mortgage when self-employed could be more difficult than you expected.
There are generally two types of self-employed categories that people fall into, although there are variations:
- Sole-Traders
- Limited Company directors
Sole-Traders are people who have not set up a limited company and are a sole entity and pay their taxes as one. Anyone can be a sole trader and when you receive your income from your work, you will need to declare it to HMRC and file your own tax calculations and overviews. Every year you will receive two documents, one showing how much tax you have paid in the previous 12 months and the other will show you your net profit left over from all the income you received in those 12 months, after your tax has been deducted. You can access these documents any time you want as long as they have been filed and calculated via the Gov.uk website.
Limited company directors are people who are listed as a director and/or share holder of an established limited company. You can establish a limited company yourself by registering one and automatically become a director or you can be added to an existing company if you are given directorship status by existing directors. Normally as a director of a limited company you will receive an annual salary and then a share of the profits form the business called dividends.
Unlike sole-traders, directors of limited companies have their income and tax assessed and documented through limited company accounts which are prepared by a qualified accountant. These accounts detail income and outgoings for the limited company for the last 12 months and show how much salary and dividends have been paid to the directors from the company’s profits. As a limited company director, you can access these accounts, as long as your accountant has completed them, by contacting your accountant directly.
Understanding how your income is structured and making sure your advisor knows is very important when getting a mortgage when self-employed. Most mortgage lenders would need you to be registered self-employed for 3 years (however some will accept less time) and will need you to have three years’ worth of income proof.
As a sole-trader, the mortgage lender will need to see 3 years’ worth of tax overviews and tax calculations (tax paid document and net profit document) They will then take an average of the last three years net-profit figures to work out your average annual income. E.g. if you earned £20,000 one year, £25,000 the next and £35,000 the year after, the mortgage lender would normally record your average income as £26,666. However, with a knowledgeable mortgage advisor, you may be able to access a lender who will use the latest years income figures meaning that your income could be counted as £35,000 depending on your circumstances and the lenders criteria.
On the flip side, here is where a struggle can crop up. With most mortgage lenders, if your latest years income figure is less than the previous year, the lender will always go off the lower figure. For example, if you earned £20,000 one year, £30,000 the next and £25,000 the third year they will use £25,000 as your annual income meaning that your affordability could be impacted.
With limited company directors, things can sometimes be a little bit more flexible. Most mortgage lenders will again ask for the last three years limited company accounts and will take an average of the last three years salary and dividends received as a director. Some lenders will again accept the latest years figures, and some will only accept the lowest figure if your income has dropped. However, some mortgage lenders will accept the salary you have received for the year and the retained profit of the business as a whole as your income. Speaking to knowledgeable advisor who can find the best lender and best route for your circumstances is the best chance you can give yourself when getting a mortgage.
Variations Of Self-Employment
Some variations of the self-employed type are:
- Partners
- Contractors
But both will essentially fall into one of the two categories.
A partner at a company is someone who has been (and essentially still is) an employee of a business who has risen through the ranks of the business to become a partial owner. They can be share holding partners or non-share holding partners and will receive profits from the business as well as a regular salary. With these individuals, they generally need to file their own taxes (tax overviews and tax calculations) on the profit they have received from the business. In the case of partners, mortgage lenders will either need to see a contract, a letter from the business or the businesses accountant showing the total income that the partner has received for the year and/or the usual tax documents required of self-employed people.
A contractor can be self-employed or employed so it is essential to understand which one you are. Contractors are people who work with different businesses and are contracted to a certain period of time e.g. 6 months and are generally paid either an hourly/daily/monthly rate. If the business, you are working with pays your tax and national insurance for you before you receive the money then generally lenders will class you as employed and will go off the value of your contract to assess your mortgage affordability. If your income comes to you without any deductions and you are expected to pay your own tax and national insurance, then lender will class you as self-employed and the usual rules will apply. An issue you might run into as a contractor is the length of time you have been doing your work, the length of time left on your contract and if your income fluctuates.
Different mortgage lenders have different rules around contractors but generally they say you will need at least 3 months remaining on a contract or have been in the contract or line of work for at least 12 months. Some accept more or some accept less. If your income fluctuates i.e. not the same every week or month, a mortgage lender may want to see three months’ worth of payslips minimum and work out an average to determine your income. It can all be a little confusing if you don’t have an advisor to help you so again, we highly recommend you speak to a mortgage broker like Oportfolio to give you a hand.
If you or anyone else you know is self-employed and looking at getting a mortgage, please give our advisors a call today for a fee free chat about your options. Going blindly into a mortgage as a self-employed person is not advisable and getting the help and guidance of a professional mortgage expert is the best thing you can do.
