Millions of people are now self-employed, and it could provide more flexible opportunities for those that are traditionally employed. But, as your income may fluctuate, it can be more difficult to secure a mortgage from high street lenders. If this is something you’re struggling with or have concerns about the future, there are things you can do to improve your chances.
More than 4.8 million people are self-employed in the UK. This accounts for over 15% of the workforce and it’s a trend that’s rising. As more people move away from traditional employment in favour of working for themselves, accessing a mortgage is going to become a larger issue.
As income can fluctuate for self-employed workers, mortgage lenders are often more cautious when approving applications. Those that work for themselves can also expect to have to provide more paperwork and jump through extra hoops to secure a mortgage offer. As a result, it’s not surprising that many self-employed people worry about how they’ll buy a home.
Proving a reliable income source
Research suggests that more than seven in ten (71%) of self-employed borrowers believe it’s harder for them to get a mortgage. One of the key challenges self-employed workers face is proving that their income is reliable.
Whilst those that are traditionally employed could lose their job with little or no notice, their positions are often seen as more secure. This is the case in some instances, but self-employment has changed a lot in recent years. The financial circumstances of self-employment can vary significantly. Some that are self-employed, for example, will work on long-term contracts and projects that will offer as much security as those working fixed-term contracts. However, it can be more difficult to assess.
The good news is that there are lenders that recognise this, and you may be in a better position than you think. In fact, figures suggest that the average self-employed mortgage holder could have taken out a mortgage 29% larger than the original loan borrowed.
Steps to securing your mortgage
1. Be realistic about what you can borrow
The first step to securing a mortgage is understanding what you can borrow. It’s important to be realistic here and it’ll depend on your income.
As a general rule, lenders will offer a maximum mortgage of up to five times your annual income but there are many other factors that will influence this figure. It can give you a rough idea of what’s achievable when you first start the process. Approaching a mortgage lender to obtain a mortgage in principle, which doesn’t involve a credit check, can also be a guide.
As you’re self-employed, it’s important to note how your income will be calculated, which we’ll look at next.
2. Be prepared to prove your income
Those that are traditionally employed simply provide paycheques from the last few months to demonstrate their income. Unfortunately, it’s a little more complicated if you’re self-employed.
Every mortgage lender is slightly different in how they’ll calculate your income. Some, for example, will look at your net profit, while others will consider your salary and dividends. This is why keeping good records is important. You’ll usually need the last six months of your earning history, as well as two to three years of accounts. Ensuring this is all in order before applying can speed up the process and boost your chances of success.
3. Check your credit score
All mortgage applicants should check their credit score and overall report. It’s what lenders use to assess whether you’ll meet repayments. As a result, if your score is low or you have red flags on your report, it pays to know about them beforehand. There may be steps you can take to improve the impression your credit report gives potential lenders.
4. Build up a sizeable deposit
Whilst first time buyers will typically need a deposit of 5-10% to purchase a home, you may find that you need to save more before searching for your dream home. If you’ve only been self-employed for a short period of time, you may be asked to save 20% or more to secure the mortgage you want. This can be challenging but it does put you on better footing for applying for a mortgage.
If you’re remortgaging or looking to take the next step on the property ladder, you’ll usually be in a better position when it comes to a deposit thanks to the equity you’ve hopefully built up in your current home.
5. Be mindful of when you apply for a mortgage
It’s crucial that you assess your financial and employment situation before applying for a mortgage
Ideally, you want to apply for a mortgage following a strong few months in terms of income and when you’ve secured a long-term contract, if this is applicable for your type of work. You should also avoid applying in the months following a gap in work, a holiday, for example. Choosing the right time to apply for a mortgage, and therefore the view lenders have on you, can have a big impact.
6. Choose the right lender for you
There are hundreds of mortgage lenders available in the UK, and only a fraction has a high street presence. Each lender will set their own criteria, with some being more suitable for those that are self-employed. Choosing one of these, or even a specialist lender, can help you secure the mortgage needed.
It can be difficult to know which lender is right for your circumstances, as well as being a time-consuming exercise. This is one of the areas when a mortgage broker can help, pointing you in the direction of lenders that are most likely to approve your application.
7. Work with a mortgage broker
It’s not just choosing a lender when a mortgage broker can add value if you’re self-employed. They can also guide you through the process, including checking your documents to demonstrate your income. With a professional acting on your behalf, your application is more likely to be accepted.
If you’re self-employed and are worried about your prospects or owning a home, please contact us. We’re here to help you put your finances in order and receive the mortgage offer needed.