Working for yourself has many advantages. You are your own boss. You can work when you want to (although this will probably mean all the time) and you stand a good chance of being better off than you would be as an employee.
But it does have its downsides, and one of these is the fact that it can be harder to get a mortgage.
Why is getting a mortgage harder if you’re self-employed?
The mortgage industry grew up in the 20th century, when work for most people meant being an employee, and many people had the same job for life.
Of course, the world of work has changed. An increased emphasis on work/life balance, and the impact of technology and the internet has led to a steady rise in of more flexible styles of working.
Around 16% of the UK workforce is self-employed. Contractors, freelancers and consultants generated an estimated £125bn last year, and the figures look likely to continue to grow.
However, some mortgage providers seem to be having trouble keeping up. Many lenders remain unwilling to lend to self-employed customers. Despite ample evidence that when it comes to finance everyone is different many still rely on very basic automated credit scoring. This labels self-employed people, which can include surgeons, solicitors and consultants of every kind as ‘high risk’, while still assuming that someone in a minimum wage role will enjoy financial stability.
The ‘computer says no’ response is all too common for self-employed homebuyers.
This can make applying for a mortgage feel daunting but it does not have to be difficult at all.
The mortgage you need
Before the credit crunch in 2007, self-employed workers could apply for a “self-certification” mortgage. With these loans, borrowers simply told the mortgage lender what they earned. Abuse of the system led to these self-cert mortgages being dubbed “liar loans” because people sometimes exaggerated their income to secure a bigger mortgage.
Self-cert mortgages are no more. You have to prove your income to any mortgage lender you apply to. Most will want to see at least two years’ accounts or tax returns, ideally from a certified or chartered accountant. Make sure your accounts are up to date and in order before you apply. But if you don’t have two years’ accounts, don’t panic. Some lenders will still be happy to consider your application if you have a track record of regular work, you have left employment to work as a contractor in the same industry, or you have evidence of work lined up for the future.
If you already have a mortgage and want to re-mortgage to save money, by lowering your interest rate, or move on up or down the housing ladder, your existing lender may be able to help. They have built up a history with you, and know you meet your repayments so are far more likely to help than a lender who doesn’t know you.
You may have to pay an early repayment charge to your existing lender if you re-mortgage.
In addition, all lenders will want to credit check you – and not just you personally. A lender will also credit check your business by running a check on your business address. So, make sure that your business credit report is in the best possible shape too. Pay off any unpaid or late debts and check the report yourself to make sure there aren’t any mistakes that could damage your chances of getting a mortgage.
Get an expert on your side
Perhaps the most important advice is to get an expert on your side. A mortgage expert from Continuum could help you find the lender who is most appropriate for your needs and help you through every step to secure the mortgage you need.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
ons.gov.uk – Trends in self-employment in the UK – 7th February 2018
ipse.co.uk – Exploring the rise of self-employment in the modern economy