In the past, mortgage lenders made it difficult for the self-employed to secure a mortgage. But times are changing, as the relative security offered by being employed narrows against someone who is self-employed.
1 in 5 people working in the UK today are self-employed or work on a ‘zero-hour’ contract; so demand for mortgages in this sector has gone through the roof – self-employed borrowers took out 120,000 new loans in 2017 alone!
That’s a big market, and lenders are responding by relaxing their criteria, removing hurdles, and making it easier to secure a mortgage.
Already, a handful of mortgage lenders have changed their lending criteria to allow self-employed workers to apply for a mortgage with just a single year’s trading accounts, including several major High Street banks. (Previously, they demanded accounts for 2 or even 3 years.)
If you do have only one complete year of trading, obtaining a projection of future earnings from a chartered accountant can give a mortgage lender the additional reassurance they need to confirm a mortgage. (But be prepared, in the vast majority of cases, securing a mortgage with just one year of accounts will also depend on having a squeaky clean credit history.)
In truth, the success of a mortgage application for a contractor or self-employed applicant often comes down to using an experienced mortgage broker, someone who fully understands your financial position, and is able to present the strongest possible case to an underwriter. That’s where we come in.
Many mortgage lenders have also lowered their barrier for subbies and contractors. Whether you’re an IT contractor, a railway engineer or a bricklayer, it’s now possible to get a mortgage based on your day-rate, or the value of your current contract.
Some banks and lending institutions now use gross income to calculate the amount you can borrow for your mortgage, rather than historic tax accounts. But bear in mind, a mortgage lender will typically assume a year has only 48 working weeks.
A successful application often depends on a good track record in a single line of work, with at least 6 months left to run on an existing contract, and that contract having been renewed at least once already. Some banks will even write to the hiring firm, in order to confirm the likelihood of the contract being renewed again in the future.
But if you’re in the CIS Scheme, you can access more favourable criteria. You won’t need a fixed-term contract, and often won’t be asked to demonstrate a lengthy track record.
Indeed, with the help of an experienced broker, some High Street banks now grant a mortgage based on the average of a CIS contractor’s gross income over the last 13 weeks.
Many self-employed workers set up as a limited company on the advice of their accountant, making themselves a director of the limited company and using this as a tax efficient payment route.
In the majority of cases, banks calculate borrowing potential from an average of personal income over the past 2 or 3 years – which is normally the salary you’ve drawn, plus any dividend. But this can be counterproductive if you want to fund expansion by leaving plenty of retained profit in the business. Because although turnover in the company has been high, this minimises your personal drawings. So, if that is the point in time you want to take out a mortgage, your true potential earnings as a director of a small limited company are not properly represented by the bank, as they disregard the retained profit.
But when working out the maximum mortgage you can be permitted, our team of expert mortgage advisors have lenders that will factor in these retained profits. And using profits plus salary often yields a much larger mortgage loan!