Mortgages for the self-employed
As an advice firm, we are often approached by potential new clients asking how to get a mortgage if they are self-employed. Many of these individuals have the preformed idea that their employment status makes it more difficult to obtain a mortgage as compared to someone who is employed on a more conventional basis.
Some even believe they may be prohibited in some way from obtaining a mortgage. In practice, obtaining a mortgage as a business owner is reasonably straightforward if you know how to present yourself to the lender and you know which lender is likely to be receptive to your particular circumstances as a business owner.
In our opinion, the only so-called difficult period is probably the first 12 months of running a business providing, of course, that the business is making profits.
Will a Mortgage Lender Consider me as Self-Employed?
The first thing to understand is what lenders consider to be self-employed, as the term in a mortgage sense may be different to a business owner’s understanding. Lenders consider anyone who has a significant control over the distribution of the profits of a business to be in the category of self-employed.
Broadly speaking this would include:
- An owner of a sole trader business
- A partner working in a partnership with others
- A shareholder in a limited company that owns 25% or more of the shareholding (20% or even 10% in some cases)
- A partner in a Limited Liability Partnership (LLP)
There are exceptions to these rules, notably in the case of Contractors, where different rules may apply. We will explore this more later in this guide.
What Criteria do Mortgage Lenders Consider for Business Owners?
A mortgage lender will want to see evidence that the profits generated by the business are sufficient to support the repayment and interest due of the proposed mortgage debt. However, different lenders will use different criteria to assess the profitability of the business.
Historically, lenders would want to see 3 years accounts for the business and most would want to see sustainable (not too large an increase year on year) rising profits over the three years. Certainly, if profits were reducing, this would have almost always led to a declined mortgage application.
During the 1980’s, the mortgage market commenced a period of unrestricted funding for lending resulting in innovation in products and underwriting. This only really came to an end in 2009 with the banking crisis.
Key to the self-employed lending market was the advent of the self-certification mortgages whereby the borrower simply declared their self-employed income and the lender took a commercial view as to the borrower’s ability to support the mortgage being applied for. Understandably, this type of underwriting greatly improved many business owners’ ability to raise a mortgage as compared to the previous underwriting regime of 3 years of suitable accounts.
Regulators attempted to ban lenders from underwriting in this way from the beginning of the century, however, this was only truly achieved with the implementation of the Mortgage Market Review (MMR) which came into force in April 2014. The changes brought about by MMR and the resulting publicity are, in my view, largely responsible for today’s perceived difficulties of obtaining a mortgage if you are self-employed.
Today, the role of a good mortgage advice firm in assisting the self-employed to find the right lender for their needs and circumstances has become much more important. A competent mortgage advisor will understand the many ways profits can be utilised and match the business owner’s profile to the right lender.
Examples of Recent Mortgage Applications for Business Owners
As each set of circumstances are unique, here are some recent examples of self-employed clients VA Mortgages has helped to achieve their desired mortgage.
Prospective New Business Owners in need of a Mortgage after 12 Months
We were recently approached by existing clients looking to transition from employed to self-employed but they were worried about how this would affect their ability to raise a mortgage in the near future.
We, in conjunction with the right accountancy advice, were able to advise them how they should organise themselves in order to give themselves the best opportunity of taking advantage of current lenders’ criteria that will allow a new business owner to potentially obtain a mortgage after just 12 months successful trading.
Low Personal Income for a Self Employed Profitable Business Owner
At the other end of the spectrum, we recently advised a client that had an established business with a profitable business track record over many years. In this case, the business owner no longer had a need for high income, preferring instead to leave the profits within the business, albeit diverting a sizeable proportion from the business directly to his pension scheme.
The low drawings would mean that some lenders would take a view that he was unable to command the size of mortgage he wanted, whilst others would take into account the retained profit within the business and the pension contribution when granting the mortgage he required.
Achieving a Mortgage for an IT Contractor based on their Day Rate
It is not uncommon today for clients in certain occupations, notably but not exclusively IT based, to go from employment to consultancy-based work. Often, this will also include setting up a limited company to receive the income from the consultancy work. In the strict sense of the word, the client is now self-employed and potentially unable to obtain a new mortgage for at least 12 months.
However, we were approached by a client with this scenario and were able to assist with her buying a new home before the 12 months were up. This is because there are lenders willing to assess affordability for the new mortgage based on the contractual day rate for the consultant, given they are effectively doing the same thing the have been doing probably for many years.
No-Nonsense Mortgage Advice for the Business Owners
These are a few of the cases we have advised on recently. There are more scenarios arising from raising a mortgage as a self-employed individual or couple that a competent mortgage advisor will be able to match to the best lender’s criteria for the given situation.
Raising a mortgage as a self-employed person is certainly different to that of an employed individual, but, it is not necessarily difficult, especially if you use the services of a competent mortgage broker! If you are self-employed and you need some mortgage advice, use the form below and our advisors will call you back for a no-obligation discussion about your circumstances.