According to the Office for Nationalist Statistics, there are now 4.86million self-employed people in the UK, representing 15.1% of all people in work. However, arranging mortgages for self-employed borrowers is frequently difficult, with many self-employed workers believing they can’t get a mortgage on the high street.
Whilst it’s certainly more difficult to arrange finance as a self-employed worker, being armed with the right information can be hugely beneficial. But this is not a one-size fits all scenario; there are different ways of being self-employed, and lenders see these differently.
What are the different ways of being self-employed?
Self-employed is an umbrella term, and within this, you might be a sole trader, the owner of a limited company, or a contractor.
Sole Traders are the simplest form of self-employed applicants; they are typically tradesmen such as plumbers and electricians. It is usually easy to present their profit, as it is a simple case of deducting expenses and taxes from their turnover. As only one individual is involved, this is a straightforward process.
The most common form of self-employed borrower we see are those who own limited companies. A limited company will have shareholders, which are most commonly the directors behind the company – these are the individuals behind the company who are responsible for any debts the company holds, but only to the extent of the amount invested in the company. It is legally a separate individual to the person behind it and they are tracked by the government on companies house.
Unlike a sole trader, the way these are run can be more complex. A company director/shareholder has the ability to leave figures in the company rather than drawing themselves down a salary or a dividend, which is how a company director would receive their income.
Contractors are a grey area—this is not technically a type of self-employment, it just means they have a definite period of time on a contract with a company rather than an indefinite, ongoing contract. However, most contractors set up a limited company which is officially the ‘individual’ on the contract. The limited company then invoices the company for their income, which makes up the turnover of the company. They then have the same benefit as a company director i.e. leaving the money in the accounts.
How do mortgage lenders see these applicants differently?
Sole traders are quite simple to arrange finance for; the income from the tax calculation is used to calculate affordability, and there isn’t any variation on this.
However, limited company directors are viewed very differently, depending on the lender. The majority of lenders will use the client’s salary and dividends average over the past three years, similar to the above. However, there are a number of lenders who will use the latest years’ figures which is often advantageous as generally accounts increase year on year. Other lenders will ignore the dividends drawn by the applicant, and will use the net profit in the accounts, as they understand not all directors want to draw down a salary to reduce tax liabilities. This can either be operating profit (before any tax deductions) or post tax profit, depending on the lender.
Contractors face a likewise complicated range of attitudes from lenders. The majority of lenders will look at contractors as a regular self-employed applicant as per the above. However, there are a number of lenders who will look at the value of the contract i.e. the daily rate multiplied by the number of days worked in a week, multiplied by a number of weeks. The number of weeks calculated varies from lender to lender; it can start from 46 weeks and go up to a full 52 weeks. This is often the most generous way of calculating affordability, but the lenders will generally require a certain level of history working as a contractor (with minimal breaks in between contractors) and a certain number of months left on their current contract.
Which banks and lenders provide the best mortgages for self-employed borrowers?
The best lender for you will depend on your circumstances, the structure of your self-employment, and what you’re looking to achieve. If you would like an individual consultation, I would be happy to advise—but as a starting point, the following details the attitudes of 3 lenders we have excellent relationships with.
Lender 1) This lender is a private bank who uses net profit before tax to calculate affordability. They also have a generous contracting policy (daily rate x 5 x 46 weeks). They also offer competitive interest rates.
Lender 2) This lender takes the operating profit for a company, which is even more generous than profit before tax. Although not one of the largest high street banks, this lender is highly competitive and well-known.
Lender 3) A challenger bank with excellent self-employed criteria, this lender are happy to take net profit before tax and also have a flexible contracting policy.
So what next?
If you’d like more information, check out our self-employed mortgage guide. Ultimately, the success of a mortgage application will generally depend on how your case is packaged up and presented to the lender. A pre-existing relationship with a lender can also help. If you’re self-employed and looking for a mortgage, I would be delighted to advise you further.