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Self Employed Mortgages – What you need to know
James Hammond from LimeTree Financial talks us through the in’s and out’s of self employed mortgages.
Many people who are self employed believe they won’t get a mortgage, is this the case?
So in my experience of being self-employed, it’s more about positioning with the right lender. If you take a very generic approach or a standard PAYE employee applying for a mortgage, it’s quite easy. You get four times income or whatever the multiple is based on your income. For those who are self employed there are many more variables to it. Are you a sole trader? Limited company partnership? Are you taking all the money from the business? There are many avenues.
From my point of view as a broker of 26 years, I love speaking to self-employed people. This is quite an exciting case to work with, to get hold of something you really get your teeth into and make a difference.
One of the most frequently googled questions is can I get a mortgage with just one year’s accounts?
Although one years accounts does place a restriction on the number of lenders there are still options. For example: If you are a hairdresser being employed in that role for 10 years and then you decide to go on your own, you will have a fair bit of experience. If however you were a hairdresser looking to set up as a gardener? Lenders are looking for consistency and continuity.
The other thing is, people very often don’t realise they were self-employed previously. So, for example, like a contractor might have been contracting for a number of years and then set his own company up. In the eyes of some lenders, they actually treat them as self-employed anyway when they’re contractors. So don’t don’t let the fact that you’ve only got 12 months worth of books put you off.
Does it need to be a complete year of accounts?
Yes, but it can depend. So for example, some people in their first year may only take nine months rather than the full 12 months because they want to bring their year end into a particular date. In these types of situations it is worth trying to discuss with certain lenders.
Are BTL mortgages for self-employed any different?
Is it an advantage or disadvantage for being self-employed when it comes to a buy to let mortgage.
Some lenders have no minimum income at all so all they will ask for is some form of paid employment. Some lenders do have minimum incomes. So you need to prove that you’ve got a net profit above £25,000. Some lenders actually underwrite the income that you generate rather than rental income that you achieve.
Every case is on its own merit. But again, don’t feel that because you’re self-employed, you can’t get a buy to let mortgage. That’s definitely not the case at all. There are 127 lenders out there all wanting to lend money and they’ve all got their own little niches. Our job is just to find the right niche at the best rate for you.
What about joint applications – where one person is self employed and one is not?
When you are employed, you work off your gross income. When you’re self-employed, most lenders work off the net income. So you have the tax deducted before, which seems quite unfair, but it is just the way the market always has been.
It wouldn’t impact a person getting a self-employed mortgage and an employed mortgage. You are still on the same route each underwritten by mortgage lenders on its own merit and accordingly to each employment contract you’ve got to the one person that’s employed would get the gross income of whatever they pay down the person, the self-employed would get the the net income of whatever their tax return.
What documents do you need? How do you prove your income if you are a limited company director?
The first thing we would do at LimeTree is ask for an accountants reference. The reason we ask? We’d ask to understand what the net profit on the business is, the gross profit on the business, but also what income is being deducted or taken out of the business. Equally important, what income has been left in the business.
With an accountant’s reference, we get to see how an application looks from all all those different angles. And the reason that’s important is because some lenders will lend on salary and dividend.Some lenders will only take into account the net profit in the business. Some lenders will allow retained profit to be used. By getting that generic snapshot of where the business is we are able to understand which lender will give most income multiples to that particular situation.
After an accountant’s reference we would look at a tax computation, but that shows the tax that’s being paid on the income that’s been taken out of the business. The tax accountant certificate will show us what’s been left in the business as well.
Most self-employed people tend to see us in advance of needing a mortgage because they appreciate it’s going to be a bit more of a challenge. They want to engage us as early as possible in the house buying process. That’s the right thing to be doing. Very often the accountant is paid to give good tax advice, and that can include reducing your tax bill.
That just means from our point of view, it’s going to be harder to get you a mortgage. So the earlier we engage, the quicker we can potentially see any problems and to realign those requirements and then working out how much they can borrow.
Does the multiple of your income differ from lender to lender?
Some lenders actually cup self-employed people to no more than four times their income because they worry about the fluctuation, particularly we’re seeing that now with Covid.
As a good example, leaders previously perhaps wouldn’t have been as interested in business bank accounts as they are at the moment. Just recently we were working on an application and the underwriters asked to see the business bank account. There’s no real reason for them to because they can see the income that’s being taken out of the business. They can see the tax returns, they can see the full accounts. However they still wanted to make sure that the business was still in a good trading position and it was not going to be adversely affected by Covid.
We have seen a change in documentation needed in retaliation to the Covid situation. As I said earlier, as many lenders out there and some of them are really good with self-employed, some of them are not so good, some of them good with limited company, some of them better with partnerships. So each case needs to be looked at in isolation.
Can you still self certify your income?
A Capital ‘N’ and a Capital ‘O”! There is no such thing as a self cert mortgage. Many, many years ago you could get sheet paper and write down an income that you felt you would achieve in the coming 12 months. That figure would be lent against. This is no longer the case. The market is much more regulated now and rightly so. We need to be able to demonstrate affordability. We need to be able to prove that you aren’t going to get these numbers and then put in a pie in the sky number and project ahead. Self cert mortgages haven’t been around for a significant period of time.
Are there any other questions you get asked?
I’m not self-employed, I’m employed.
Sometimes we speak to people and they say, I’m not self-employed, I’m employed. In the eyes of most of the lenders. If you own more than a 25% share in your business, then you are deemed to be a decision maker. So therefore you are self-employed even if you get paid a salary. You are treated as self-employed and people often don’t think they are going to be because they are on a PYAE style system.
If you leave money in the business, you can still get the benefit of that in your mortgage calculation. Just because you haven’t drawn it out doesn’t mean that you should not utilise that money. So, again, getting in front of somebody before you finalise your accounts is really, really important so that the brokers have the chance to explain to you the differences in how that money is positioned.
Get in touch with us early.
We try our hardest to prepare and to have a bit of a longer term strategy with self-employed people as there are a lot more variables. What’s right for mortgages isn’t always the same as what is right for tax planning. So it’s important to get some advice as soon as possible.
I love hearing the sound of my own voice, so I’m happy to offer my opinion to anybody that’s prepared to take it. The other thing is to speak to somebody that does understand the self-employed market, a lot of people think the fact that I’m self-employed means I can’t get a mortgage. That definitely isn’t the case. You know, there are millions of self-employed people in the UK, someone earning tremendous amounts of money and some a very little amount of money. There are still lending options out there for everyone in that field.
I do genuinely enjoy helping self-employed people because we all work hard for our money. The last thing we want to do is give it away when we don’t need to.