Blocked by the banks? How to get a mortgage if you are are a small business owner or self-employed
The financial crisis has taken a heavy toll on business owners and the self-employed looking for a mortgage, however, while times may be tougher it is still possible to secure a homeloan.
We lay out the options available to the self-employed and small business owners, and the tricks and traps to watch out for to help you to secure your dream property.
Remember, while this guide can give you useful information, every lender will have its own criteria and will assess each borrower individually. Some will have more flexibility or discretion that others and factors such as your credit score and your deposit will be taken into account.
Get it fixed: Finding a mortgage if you are self-employed or a business owner can be a tricky task
The problems faced by business owners and the self-employed
Gone are the days of self-certification mortgages, which required little or no proof of income and allowed the self-employed to get a loan relatively easily.
They were designed with the self-employed in mind but were abused by some in the lead-up to the financial crisis, leading to them being dubbed 'Liar Loans', and are no longer available.
But, with no replacement, many small business owners feel left out in the cold by lenders.
Nowadays, although it is not impossible for someone who is self-employed to secure a mortgage, it can certainly be a difficult process because lenders are far less willing to take what they see as a risk on those with a 'non-standard' income.
This can be frustrating because, despite having the savings and income needed to pay a deposit and keep up repayments, you may be refused a mortgage simply because your income does not fall into a 'standard' bracket.
Don't despair though. It is still possible to get a mortgage, but it is more important than ever that you know what you are doing.
What kind of business are you?
Mortgage brokers apply different rules depending on whether you are self-employed, a partner, or director of a limited company.
James Cotton, of London and Country, This is Money's mortgage service partner highlights the differences:
A lender will typically class you as self-employed if you own more than a particular percentage of a business – usually 20 per cent or 25 per cent.
If you are classed as self-employed then you will need to prove the income that you are declaring. This can be done by supplying the accounts of your business or an accountant’s reference, which usually need to be prepared by a qualified accountant.
The standard requirement from a lender is to see two or three years’ proof of income, although a few may accept as little as one year in certain circumstances.
You will be assessed on profits and lenders may want proof that you'll earn similar sums in the years ahead by asking about your business and what contracts or clients you have lined up.
If you do your taxes by self-assessment and get the Revenue to calculate it for you, you may get a form called an SA302, which shows the total income received and total tax due.
Remember, even if you are permanently employed with tax deducted by your employer, if you have additional income, this may be classed as self-employed income. If so, it is likely to be treated in the same way as income from someone who is 100 per cent self employed.
Most lenders will treat partners in a business in much the same way as self-employed borrowers. They will typically look at your share of net profit when calculating how much you can borrow.
Directors of limited companies
If you’re a director of a limited company then your total income may be made up of a combination of basic salary and dividend payments. Lenders will usually consider both these elements of your income, although exactly how they treat it can depend on your share of ownership.
Establishing your true income
HOW SMALLER BUILDING SOCIETIES CAN HELP
For the self-employed and business owners it can pay to look away from the banking mainstream, when it comes to securing a mortgage.
Smaller building societies often pride themselves on their ability to assess individual applications on a case-by-case basis, rather than a computer-says-no approach.
For example, both Harpenden BS and Saffron BS, are known for welcoming applications from the self-employed and may be able to help where other lenders cannot.
Borrowers may find restrictions are in place at some societies, such as a local lending policy. A good mortgage broker should be able to tell you about deals and whether smaller building societies can help you. If they don't, ask them about it.
Mortgage lenders usually calculate how much they are willing to lend using a combination of your credit score and salary records.
Clearly, if you are not an employee with a regular paycheck it is going to be more difficult to work out your income using standard calculations.
In addition, lenders now typically use complicated affordability calculators to work out how much you can borrow, as opposed to the more traditional method of lending a basic multiple of your annual income.
If you are self-employed, or maybe a partner or director in a small business, your overall income may be more complicated – you may receive it in other ways than just a standard basic salary or from different sources.
You may also have good and bad months or years, some of your equity may be kept in the business, or your accountant may be using, perfectly legal, tax loopholes - all of which will affect how your personal accounts appear to a lender.
Therefore, often the main issue is not proving your income, rather it is establishing a figure for the purposes of assessing how much you could borrow on a mortgage.
After all, while you may want to maximise the amount you can borrow, neither you nor the lender will want you taking on a mortgage you can’t afford.
As Cotton explains: 'If you’re self-employed, your income may fluctuate quite considerably from one month to the next or from year to year so estimating a typical monthly budget may be difficult.
'Perhaps your business is experiencing fast growth at the moment which means recent earnings are a lot higher than previous years. If this is the case then lenders will often take the average of the last three years’ income rather than just the latest year.
'However, if your latest year’s income is lower than previous years, this may be the figure that a lender will base affordability on.
'If you’re a director of a limited company, you’re likely to have profits that you choose to retain in the business, rather than take out as salary or dividends and again, you may want these to be assessed for mortgage purposes as well as the profit you take out. Some lenders may be able to consider some retained profits, depending on your accounts.'
HOW WILL NEW MORTGAGE RULES AFFECT THE SELF-EMPLOYED?
The Financial Conduct Authority was concerned that lenders were making it too easy to get a mortgage before the financial crisis.
As a result it has introduced the new rules, known as the Mortgage Market Review, to ensure borrowers are accepted for mortgages they can afford - both
now and in the future.
But the self-employed and people on short-term contracts could suffer most from tougher access to home loans.
David Hollingworth outlines how they will be affected:
'All borrowers have to prove their income whether they are employed or self employed and so the difficulty for self employed borrowers is in how they evidence that income. As it can vary rather than be a set amount each month like an employed person’s basic salary it means that they have to stump up two to three years of accounts/self assessment to give a lender a plausible income to apply for affordability purposes.
'The new MMR rules haven’t really affected what is required to prove that income but will have an impact on what else they will be asked around committed expenditure.
'So the income that they prove will then go into the same affordability calculator as any borrower, along with their expenditure in order to evaluate the amount they can borrow. So the new rules will not really make it tougher for the self employed than the employed but adds another layer to the complexity of securing a mortgage.
'In the same way as lenders have varying approaches to lending criteria, they have interpreted the MMR rules differently so it becomes more important to target the search appropriately.'
Which mortgage will I get?
In theory, self-employed borrowers have access to exactly the same range of mortgage products as everyone else, so long as you are able to put down the necessary deposit and prove you can make the repayments on your loan.
Nearly all lenders will take self-employed earnings into account if you can produce a SA302 form.
There are a handful of specialist lenders who offer products designed specifically with the self-employed in mind. But mainstream mortgage lenders routinely lend to the self-employed too, so you may not need to use a specialist.
It's worth checking with a mainstream lender first to see what they can offer, before assessing your options with a specialist.
You should have full access to the choice between fixed and variable rate mortgages, including tracker mortgages.
Read and bookmark This is Money's mortgage expert Simon Lambert's regularly updated What's next for mortgage rates and should you fix? To stay abreast of the best deals.
Some lenders do make having a larger deposit a condition of lending to self-employed borrowers. If one lender is asking for too much, check elsewhere - each have their own criteria.
Remember, always shop around for the best rate, since some lenders feel more comfortable about self-employed borrowers than others.
But I keep coming up against barriers..
In reality, securing a mortgage if you're self-employed can be an onerous process.
You only need visit a few online forums to see hundreds of examples of frustrated prospective homeowners that are unable to get on the property ladder because their earnings are non-standard - even when they have a substantial deposit.
Keep plugging away though and try and speak to other self-employed people, or business owners, they can give you some tips and point you in the direction of helpful lenders.
A MORTGAGE BROKER'S TRICKS AND TIPS
As a business owner you’re obviously going to have your own reasons for structuring your business and its income in a certain way, other than to improve your chances of getting a mortgage, explains London & Country's James Cotton.
That said, it’s worth knowing a few tricks and tips that could help or hinder you in that regard:
- Keep your accounts up to date – your most recent accounts cannot be more than 18 months old for mortgage purposes
- If you have an accountant, make sure they are certified or chartered
- Ideally, to maximise your chances of getting a decent mortgage, you want your company turnover and profits to be consistent or increasing – obviously easier said than done!
- Lenders will often prefer SA302s and accountants references to standard accounts as proof of income
- Have SA302 forms ready prior to a mortgage application – they take a couple of weeks to arrive in hard copy
- Retaining too much profit within the business could restrict the amount you can borrow – paying a fair dividend against the profit made each year should help
- Beware if you’re thinking of switching company type (i.e. from sole trader to limited company) prior to applying for a mortgage – this could hinder your application
What else can help?
As with any mortgage, having a decent deposit will help you – both in terms of getting a good interest rate and improving your chances of getting accepted.
A good credit rating is also a must. Although you may find a few specialist brokers that can help those with a poor credit score, you may not have access to decent rates. It is hard enough for those on a payroll with a poor credit history to find a mortgage with a decent rate - let alone overcoming the added hurdle of being self employed.
Is frustrating as it may seem, it is probably worth working on your credit score before applying for a mortgage.
Learn how to improve and check your credit file and get a free 30 day trial with Experian here.
If your earnings are too low to owe tax and you haven't filled in a tax return you won't be able to get SA302 forms and so won't satisfy a lender's requirements.
What if I don't have at least two years' accounts?
Savings: They could help you secure a mortgage
If you don’t have two years’ worth of records, you may still be able to get a mortgage.
For example, self-employed workers who have a regular track record of contract work can usually use this to their advantage. Or, if you have large amounts of savings, some lenders may be more sympathetic.
For those that already have a home loan, but wish to remortgage, your existing lender may be more sympathetic, especially if you have a good history of making timely repayments.
Remember, if your income is not a straightforward salary, you may well find it difficult to find a mortgage without help. Getting an adviser that can understand your situation and finding the right lender is key.
What if I don't meet any of the criteria?
If you are a first time buyer, if you want to borrow more money on your existing mortgage or if you already have a mortgage but want to move, the cold hard truth is you'll have to wait until you have the necessary proof of income, or until the market evolves.
If you already have a mortgage, then you'll most likely revert to your lender's standard variable rate (SVR) when your present deal expires. The only upside is that with the Bank of England base rate at a 0.5 per cent historic low, SVRs are far cheaper than they used to be.
Hope is on the horizon: With increasing numbers of people starting up their own businesses, the Council of Mortgage Lenders has promised lenders will try to develop new methods to help borrowers verify their income - so w atch this space!
- Are you having problems securing a mortgage? Post your questions on the comment thread below and our experts will get back to you