There is a common misconception that the self-employed have to apply for a specific type of mortgage. This misunderstanding is likely a result of the mortgage application process which is much more complex for the self-employed.
If you are a full-time employee of a company and you have a work contract, payslips and can prove the same amount of money lands in your bank account every month, you’ll have a fairly easy time securing a mortgage. For the self-employed, the process is a lot more complex.
Since the self-employed typically have irregular income that fluctuates month-to-month, lenders have a tougher time determining their level of risk. You can work out this with a calculator. When your monthly incoming and outgoing figures are pretty similar every month, it’s much easier to determine if you will be able to make your mortgage payments.
But with self-employment, you might have a really busy period followed by a quiet period. The self-employed nearly always put measures in place to make their income last through periods of feast and famine, but this does little to reassure lenders.
To counter this, lenders will carry out stringent checks on self-employed income. This is where the myth of the self-employed mortgage originates. Lenders will ask for more detailed income information, often stretching back multiple years. This is why many self-employed individuals believe they will not be eligible for a mortgage.
Is it harder to get a mortgage when self-employed?
The application process may be more thorough for the self-employed, but once you have satisfied the affordability checks, the mortgage application process is identical to that of anyone else.
The biggest obstacle the self-employed face is proving their income. Before the 2008 financial crash, the self-employed could apply for something known as a “self-cert” mortgage. This allowed them to state their earnings without any checks. Unfortunately, individuals overstating their earnings to borrow more money was one of the factors that led to the financial crash.
This type of mortgage is now illegal and lenders must carry out more stringent checks. For the self-employed, this means handing over up to three years of accounts. This can mean sharing your SA302 tax summary or having an accountant verify the information.
For the newly self-employed, this is a significant obstacle to homeownership. Proving your income when you have fewer than three years of SA302 forms can be a struggle and might make some people wrongly assume they are unable to secure a mortgage.
Can I get a mortgage with just one year of accounts?
If you have recently switched to self-employment and only have one year of accounts to prove your income, you may still be able to secure a mortgage. Some lenders are more lenient and understanding of how the self-employed make their money.
By approaching the right lender, you may be able to secure a mortgage with just one year of accounts. Some lenders will even take into consideration future earning potential if you have evidence of contracts lined up.
Finding the right lender is always a struggle. The best option for the self-employed is to work with a specialist broker. They will have an in-depth understanding of the mortgage market. They will know which lenders are most likely to be willing to work with you. And they will know how to maximise your chances of being approved.
How can I increase my chances of getting a mortgage?
If you only have one year of accounts, a lender may want you to make up for this in other areas of your application. Remember that lenders are focused on risk. Lending to an individual with just one year of accounts is considered to be a higher risk than lending to someone with a three-year track record.
To reduce their risk, the lender may want to see a bigger deposit. This could mean you might need to save a deposit that is 15% of the value of the property instead of 10%. In general, the bigger deposit you can offer, the greater your chance of acceptance. This is because a bigger deposit drives down your LTV, which means you are borrowing less money and putting more of your own money on the line.
Another way that lenders can control their risk is to offer higher interest rates. It may be that you can secure a mortgage with just one year of accounts, but this mortgage could cost more in the long term. With a good deposit and three years of accounts, you are likely to secure a better mortgage rate than you would with a smaller deposit and just one year of accounts.
When applying for a mortgage with just one year of accounts, you need to weigh the cost of taking on a loan at a higher interest rate. By waiting just one year, you could boost your deposit and have another year of accounting information to satisfy the lenders.