Mortgage changes for self-employed people
Mortgage lenders will now be requesting new tax documents as proof of your income. Calling all self-employed people. Get your tax documents organised now to make sure you aren’t caught out when applying for a mortgage.
Generally, when it comes to self-employed people, mortgage lenders like to make things a little bit more complicated than employed borrowers. The main reason being that you don’t necessarily always get a consistent income per week or per month like an employed person does. Self-employment can fluctuate based on how well the business is performing, how much is being re-invested, how much you are spending on product or services and how much you may be paying other employees.
What Do Mortgage Lenders Ask Self-Employed People For?
For people who are classed as sole traders (without having a limited company set up) mortgage lenders will normally want to see your last two- or three-years tax overview and tax calculation documents from HMRC showing exactly how much income you have received gross for the year, how much tax you have paid for the year, and how much you have left over as net profit.
If you own a limited company and/or are a shareholding director or a limited company, the lender will normally want to see two- or three- years’ worth of limited company account which will have been compiled and audited by your accountant. These accounts will show things like how much income the company received, how much assets the company has, how much it paid out in terms of salaries and other costs and various other financial incomings and outgoings to the business.
What Are The Changes That Self-Employed People Need To Be Aware Of?
Mortgage lenders will need to see your latest years’ self-employed figures to make sure that your income is still coming in and profitable. Usually, as of the 4th of October every year, the lenders change their criteria for which year’s figures they need to see. So, for example, up until the 4th of October this year, most lenders were asking to see the tax document for the years 2019-2020 and 2020-2021 so that they can get an idea of exactly how much income the borrower earned over the last two years.
However, as of the 4th of October 2022, they have moved on to needing to see the tax documents for the next financial year so they lenders now need to see self-employed people’s 2020-2021 and 2021-2022 tax documents. From a tax standpoint, HMRC do not actually require 2021-2022’s financial documents to be completed and filed until January 2023 however, mortgage lenders need them to be done now.
So, bear that in mind if you are a self-employed person looking to get a mortgage. Speak to your accountant and arrange for them to complete your documents before you apply for a mortgage, as having the incorrect documents will only hold things up in the process.
The way that the lender sees it is that if they are still checking your 2019-2020 documents, they are looking at figures that are over 18 months old and not that recent. A lot can change in 18 months (take the COVID-19 pandemic as an example) so lenders want to see the most recent figures possible to assess if they feel comfortable lending to you.
Speak To A Mortgage Advisor About Self-Employed Income Requirements
You can find out more about self-employed income requirements and mortgages in other articles we have written. If you or anyone else you know is self-employed and are looking to get a new mortgage or remortgage your property, please give our team a call to discuss your income and your mortgage affordability.
