Obtaining a mortgage used to be reasonably straight forward but recent changes mean lenders want to see strong proof of income plus the ability to keep-up mortgage payments if interest rates rise.
But what about self-employed or freelance people whose income fluctuates from month to month? Producing two or three years’ of accounts can overcome this if you are registered as a limited company. Also, sole traders who complete annual self-assessment returns can show SA302 forms from HMRC.
That’s the theory, but there can be difficulties depending on how you are set-up as self-employed. Sole traders, company directors and contractors are each assessed in a different way. Contractors, for example, can be assessed using a bespoke underwriting process that calculates annual gross earnings from a day rate, assuming the individual meets certain criteria, including having a contract lasting at least three months.
Company directors are likely to be assessed on both wages and dividends, which could put you at a disadvantage if you’re leaving the majority of your profits in the company account to reduce your tax bill. In that case you need to find a lender who will agree to assess you based on the company’s net profits.
“What we have is different lenders assessing self-employed company directors in different ways,” says John Yerou, managing director of Freelancer Financials, a specialist mortgage brokerage service. “So one lender will give you more than the other because they have a different underwriting process to assess your affordability. There are only about five or six high street banks that will look at net profits.”
The fact that branch advisers are more used to dealing with employed people than those who are self-employed is another potential roadblock for freelancers to navigate, says Yerou.
Isabel Thomas experienced this when she tried to move home with her existing lender in 2012, having gone freelance as a children’s writer since securing her original home loan in 2011. “The guy we dealt with in the branch didn’t seem to know what would or wouldn’t be acceptable,” she says. “It felt like no one really knew what was going on and it was hard to get people to look logically at your situation. It just added this huge amount of extra stress.”
Despite having three years’ worth of records, Isabel and her husband still ran into problems. “For the first three months we were house hunting with £50,000 more in mind than we could actually get,” says Thomas. “Instead of averaging over two years, which they said was their policy, the reality was that if the most recent year is lower, they will go with that. Because I had just had a baby and earned a third of what I would usually earn, I was really penalised.” In the end, the couple had to start their house search again, with a reduced budget.
For those will less than a year’s accounts it’s even more difficult. Some lenders review each case individually and the application is assessed by an underwriter. Others use credit scores.
When it comes to choosing a mortgage type, many of the same considerations apply whether you’re employed or self-employed, though offsetting – where you reduce your mortgage interest by holding a cash account with the same institution – can lend itself to freelancers.
“Self-employed people quite like offsetting because they’ll put cash to one side every month towards their tax bill,” says Hollingworth. “That will offset against the mortgage, so you pay less interest. If you’ve got a varying income, the ability to stash cash and reduce your interest and yet still have access to it, is attractive. The only downside is that usually they’ll charge a slightly higher interest rate.”
Some brokers offer their services free of charge, but others charge a fee. That could be worth paying if it allows you to access a mortgage with minimal fuss. The broker should know what each lender is willing to offer and may be able to use their ongoing relationships to secure better deals.
But even with a broker getting a mortgage as a freelancer can still be a more complicated than it would be if you were employed, and the message from those who have done it is clear: be prepared for less than smooth sailing.
“It was a shock how much more work we had to do to get on as a freelancer,” says Wilson. “It’s the amount of forms that have to go back and forth. Allow that bit of extra time, even once the mortgage has been approved in principle.”
The best place to begin if you are self-employed and need a mortgage is to contact Vincent & Co. We cannot advise you ourselves, but we know trustworthy people who can.