Summary: The 6 UK Banks That Lend to Self-Employed People (And What They Need From You)
By Ed Emerson
Today we’re going to keep it simple and tell you exactly which banks (in the UK) lend to self-employed people, and what you’ll need to apply for each in order to get a mortgage. You’ll have questions that range from things like, “How many years’ accounts do I need?” and “What if I have bad credit? Can I still get a mortgage?” and “What documentation / paperwork do I need to apply?”
We’re going to answer all of that and more with short concise information on each lender so that you know which banks lend to self-employed people and not waste your time (and injure your credit) by approaching the wrong lenders.
First, The Smart Way to Check Your Credit
One of the most common problems to 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. And not checking your credit is a dash of stupidity in a cocktail of mortgage rejections and higher than necessary interest rate options.
Don’t Do This – 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.
Do This – 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.
And Then Do This – 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.
Remember – 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.
Now, On To The Lenders (And What They Need From You)
We try to ensure that this information is as accurate as possible at the time of writing, however, keep in mind that the mortgage market has recently undergone some changes to interest rates – the base rate was lowered from 0.5% down to 0.25% in August – and lenders are always making slight adjustments to product offers and criteria.
The following should help you on your way and let you know who to target in the first instance for you first or next self-employed mortgage:
The under-the-radar lender for mortgage applicants in the self-employed space and/or who run their own business.
They accept 2 years’ accounts prepared by a suitably qualified accountant or your last 2 years’ SA302 and accompanying Tax Overview documents obtained from HMRC.
Unlike high street lenders they will usually use the latest years’ figures rather than an average of the last 2 years when making their assessment, if your net profit is level or rising. That’s great news for newer businesses or if you had a particularly good year last year trading.
The following is considered for income purposes:
• Sole trader: annual net profit
• Partner: annual share of net profit
• Director: annual salary and dividends
The first of the contractor-friendly lenders for self-employed professionals who rolled out mortgages to non-IT contractors a few years ago. Here’s what you’ll need:
- the gross value of your current contract as evidence of income
- they doesn’t ask for any minimum daily rate for IT contractors
- non-IT contractors must earn at least £312.50 per day
- contractors on their first contract must have history in the same profession for at least 2 years
- at the time of application, the borrower must have at least 4-6 weeks left to run on their contract. If not, they must provide evidence of a contract renewal/extension
- an up-to-date CV is mandatory, outlining your employment and contracting history
- Halifax underwriters don’t like to see more than a 6-week gap between contracts, and
- gross annual income (for lending purposes) calculated as a Daily Rate x 5 (days) x 48 (weeks).
Like the Halifax, Clydesdale joined the self-employed mortgages market a few years ago. These are the Clydesdale’s requirements:
- they accept applications from contractors on an “open” sector approach, with a minimum calculated income of £75k pa
- expect the applicant to have had their contract renewed at least once
- calculate income by taking the average weekly rate from the current/previous 2 years’ contract × 46; calculate income pro-rata for any contracts of less than 35 hours per week
- do not accept offshore income structures
- consider contractors with less than two years contract history, providing the LTV doesn’t exceed 70%
- require the current and previous contracts; in addition, the latest 3 months’ bank statements should be evidenced
- expect a CV demonstrating at least 2 years contracting experience in the sector, with no more than breaks of 6 weeks between contracts dates; said CV must also include income details covering at least 2 years
- expect a minimum of 4-6 weeks remaining on the borrower’s current contract; if less time remains, they must provide evidence of a contract renewal/extension, and
- calculate annualised income as: Daily £ Rate x 5 (days) x 46 (weeks).
This might be the best stop for many self-employed professionals looking for a mortgage, particularly if the above options thus far seem less than accommodating. It’s also the newest lender into the market and:
- looks for a minimum of 12 months contracting history
- calculates earnings over 46 weeks, annualised income calculated at ((daily £ rate x 5) x 46)
- doesnot like to see more than 6-weeks gap between contracts unless there is a good reason, and
- will consider a less than perfect credit history!
If you’re a contractor operating through an umbrella company this may be the mortgage lender for you. Depending on the length of your current contract, Virgin Money is looking for:
Mortgage Criteria for a 12-Month Contract
- your current contract must have at least 6 months remaining to run; failing that, you need to supply evidence of new/renewed 12 month contract
- you must provide your previous contract, which must show a term of 12 months
- your CV must prove continuous employment on this basis; i.e., no more than a 2 month gap between contracts, and
- Virgin calculates your annualised income for lending purposes thus: ((Daily £ Rate x 5) x 46).
Mortgage Criteria for a 6-Month Contract
- your current contract must have at least 3 months remaining to run; failing that, you need to supply evidence of new/renewed 6 month contract
- you must supply evidence of 24 months continuous employment on this basis; i.e., no more than a 2 month gap between contracts, and
- Virgin calculates your annualised income for lending purposes thus: ((Daily £ Rate x 5) x 46).
SAFFRON BUILDING SOCIETY
While some lenders in this space prefer IT contractors, Saffron takes a more inclusive approach and welcomes contractors from all niches and pay grades. Saffron is looking for:
- a minimum six-month term left to run on your contract
- proof of contract history of six months at 80% LTV, rising to 2 years at 90% LTV
- your annualised income for lending purposes as ((Daily £ Rate x 5) x 48)
- no adverse credit scores
- repayment mortgages only
- a minimum age for acceptance of 25
- proof of income documentation as your current and previous contract
- your last six months’ invoices
- your six months’ bank statements, showing invoice credits, and
- your up-to-date CV, outlining previous employment history.
What About Paperwork / Documentation
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 certaindocumentation, 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.