By Ed Emerson
With every new freedom comes a new responsibility.
And just as certainly as changing your career direction from being a full time PAYE employee towards the more “entrepreneurial” contractor, freelancer or self-employed business owner role, there are certain realities that follow.
One of these is that the door to a common mortgage or re-mortgage application process is now closed to you.
That’s because you no longer fit into the standard pay-as-you-earn model that every lender understands.
Instead, the vast majority of lenders will look upon your application as something of a financial curiosity; a broad and unruly picture of often low monthly wages to stay beneath the taxable income line, and thereafter, sporadic dividend payments that can make reckoning your income under the terms of the 2014 Mortgage Market Review (MMR) into a series of irreconcilable differences.
As such, millions of self-employed applicants often fall at the first hurdle in this process.
They never come to realise how these newly placed hurdles must be overcome in order to land a long-term low-rate mortgage when you’re self-employed.
And if you get it wrong by trying to stumble through according to the old rules you can end up quickly spoiling your credit, alienating lenders and sullying your chances at a new home or a re-mortgage deal on your property.
Today we’re going to help you understand the three main pieces to this puzzle, the order in which they’re connected and how they fit together in the new post-recession mortgage world for self-employed people.
A Bit of Self-Employed Mortgage Market Background
The first thing you need is a bit of background about what has happened since the real estate recession ended back in March 2009, and the loose rules on credit tightened when MMR came into place in 2014.
These rules eliminated things like self-certified (liar’s loan) mortgages, a former mainstay of the self-employed space, and closed off a primary route to home buyers seeking funding who were not considered formal employees of someone else’s company.
In short, things got a lot more difficult very quickly, and for a short time the self-employed mortgage market all but dried up.
The ‘New’ Self-Employed Mortgage Lenders
But a few banks then got savvy and recognised the need for mortgages from the UK’s millions of self-employed operators.
It was a niche but rapidly growing sector of the market that required special considerations for non-standard income calculations, and firm guidance in order to comply with MMR.
The first lender into this space was Halifax, followed by Cydesdale and then in no particular order; Kensington, Virgin, Aldermore and Saffron. These are the six lenders in the UK who you should focus all of your efforts on when applying for a mortgage or re-mortgage as a self-employed applicant from here forward.
Rule #1 – Identify the lenders who work in the self-employed mortgages space. They are set up internally to understand income pictures that would, in another lender’s underwriting department, be considered complex or inconsistent. We’ve listed those lenders who specialise in the self-employed space for you here.
The Smart Way to Check Your Credit
One of the most common problems tor arise when anyone applies for a mortgage without first checking their credit is an unexpected glitch on the reports of one or more of the UK’s main credit referencing agencies: Experian, Equifax and Callcredit.
Unfortunately, assumptions about how things are have no place in a heavily regulated environment like finance.
Not checking your credit is a dash of stupidity in a cocktail of mortgage rejections and higher than necessary interest rate options.
Far too many applicants simply check with one agency. They’ll choose the one they think the lender will check.
Individually, it costs between £12 and £15 per month to subscribe to a credit referencing agency after the initial free trial period. And you’ll likely need to subscribe for longer if there are errors or things that need to be fixed on your report.
But as noted above; each agency holds a separate report on you, and there’s no guarantee that just because one is clear the others will be too.
Likewise, if one report is showing a problem it’s in your best interest to check the others as well. And this can get a bit expensive.
But there is a way to do this that’s far less expensive and offers a single resource where you can check all three at once. It’s called Check My File; a company endorsed by Money Saving Expert and which, to my knowledge, is the only agency of its kind that gives you comprehensive access to all three of the main credit referencing agency reports.
Checking your credit is an absolute must.
Additionally, one of the most oft-referenced and well-regarded accountancy and mortgage brokering services in the UK’s self-employed mortgage space is called Crunch. The organisation was essentially set up with the specific purpose of helping people to secure mortgages while self-employed, contracting or freelancing. This link here will take you to the accountancy-related section, but just click on the “Other Services” button for mortgage assistance.
Rule #2 – You must check your credit before you apply. You can do so individually with each of the three main credit referencing agencies in the UK – Experian, Equifax and Callcredit – or you can check all three in one go at a third of the price with Check My File.
Adjusting Your Income
Don’t kid yourself about your financial position because the lenders won’t think it’s funny at all.
Before you apply you need to go through a thorough and rigorous accounting of what’s coming in to your personal account, not just your business account, and what’s going out.
There are a number of mortgage income and expenditure forms out there that are free to use.
I’ve linked to the one from Countrywide here.
Remember that the lenders will look at everything from stable monthly / weekly bills to social and childcare expenditure, and think about how family or friends (good ones!) can help in the run up to applying (at least three months in advance) with childcare costs to reduce outgoings.
And be frugal in your social life.
But there’s one other absolutely crucial part of this: Consider if it might be necessary to adjust how and what you pay yourself in the short term.
Now, I know that the most tax-friendly strategy is to pay yourself to the maximum level before your base income becomes taxable, and then top up your income with dividends as and when appropriate.
It’s the most common way to go about things when you’re self-employed.
But sometimes, if you haven’t been in business, or contracting or freelancing for that long a period of time, or your personal expenditures are such that you’ve kept your income very very low, you may want to adjust the wages element upwards at least three months in advance of making your application.
This is just a suggestion. After all, you want to present the most financially sound face that you can to the lender when you walk through their door.
Rule #3 – Consider your income and expenditure carefully in the run up to your self-employed mortgage application – at least three months in advance. And don’t leave anything out, particularly as it relates to things like childcare costs and regular (habitual) social expenditure. Also have a think about adjusting how you pay yourself in terms of wages and dividends. A little additional tax paid in the short term in exchange for a higher basic wage could make all the difference when your application is on the underwriter’s desk.
And there’s one more thing…
Your documents (a list of the key ones will follow) will help to prove your identity and tell the lender your financial story:
Those who specialise in the self-employed mortgage market will look for certain documentation, including:
- Passport(s), and any accompanying Residency Permit / Residency Card you may have if you were not born in the UK.
- The last 1-3 years accounts for your business, along with the company’s certificate of incorporation, shareholding information and related company documents (Ts & Cs).
- The last 3 months of bank statements for the account(s) that your income is paid into, and from which your current mortgage/rent is paid from.
- The details of any personal loans, credit cards and other balances that are not paid off monthly.
- Your latest annual mortgage statement or highlighted rental payments on your bank statements – make it easy for them to find everything. Poor assumptions kill good applications.
- The last 3 months payslips for all applicants.
- An SA 302 Form (if applicable). It’s a form submitted to HMRC by your accountant on your behalf and shows the actual submission of all income you receive, less any personal allowances. In other words, the actual amount of income you pay tax on. It’s very commonly used by lenders since the April 2014 change (noted above).
Lenders will also require the HMRC Tax Overview form, but your accountant should know what this is, and what to ask for.
Want to know more?
Why not see what HNW Magazine’s Self-Employed Mortgages section here has to offer you in terms of advice, guidance and options.
And look out for HNW Magazine’s report The 5 Steps to Getting a Mortgage When You’re Self-Employed for consultants, freelancers and entrepreneurs, out soon, and take advantage of the mistakes others have made so that you don’t have to.Follow HNW here - For the life you want to lead...