Self-employed workers have always faced additional challenges when trying to get on the property ladder. But stringent affordability tests mean it’s becoming even more difficult to secure a mortgage.
Government statistics show in 2021 around 13% of the UK’s labour force was self-employed. So, the barriers for self-employed workers are something thousands of aspiring homeowners need to overcome every year.
According to the Telegraph, it’s “never been harder” to get a mortgage if you’re self-employed.
If you don’t have a predictable income, lenders are likely to ask you more questions. However, lenders are reportedly asking self-employed workers questions that weren’t common in the past, such as which energy supplier they are with or if they can supply a reference from their accountant about the strength of their business.
As lenders are being more cautious, it’s estimated they rated only 65% of self-employed mortgage applications as “affordable” at the end of 2022.
So, if you’re self-employed and seeking a mortgage, what can you do?
1. Check your credit report
Anyone seeking a mortgage should check their credit report. It’s one of the tools lenders will use to assess how much of a risk you pose. Going through your report before you apply gives you a chance to uncover potential red flags first.
Things like payday loans or large credit card debt could lead to your application being rejected, even if you’re confident you could meet the repayments.
There may be things you can do to improve your credit report, such as registering on the electoral roll or paying off an overdraft.
2. Prepare evidence of your income
You will need to prove your income when applying for a mortgage. As a self-employed worker, this is usually done by providing your self-assessment tax returns.
You will typically need a minimum of 12 months of accounts to be eligible for a mortgage. However, some lenders may require evidence of your income for two years or more.
Getting your paperwork in order before you apply for a mortgage could help you identify potential gaps and ensure you have everything to hand.
3. Be mindful of how steps to reduce tax liability could affect your mortgage application
When taking an income from your work, you may take steps to minimise your tax liability. While this can help your money to go further, you should be mindful that it could affect your mortgage application.
For example, not every lender will consider “retained profits” as part of your income as a self-employed borrower.
Your income is used to calculate how much you can borrow – a typical amount is 4.5 times your annual income – but this varies between lenders and will depend on your circumstances. So, managing your tax bill could have a knock-on effect on the amount you could borrow or even mean a lender rejects your application.
4. Keep track of your contracts
If you have a pipeline of work or long-term projects, having your contracts to show lenders could be useful. It can demonstrate that you’ll have an income in the future, and boost their confidence that you’ll meet repayments.
Borrowers that pose a lower risk could benefit from a more competitive interest rate and lower repayments as a result.
5. Save a larger deposit
You could access a mortgage with a 5% deposit. However, if you want to improve your chances of success, a larger deposit could tip the scales in your favour – the larger the deposit, the less risk you pose to a lender.
Taking some time to save more for your deposit might be frustrating, but it could make all the difference.
6. Look beyond high street banks
There are lots of mortgage lenders to choose from. While your first thought may be to approach a familiar high street bank, alternatives may be more likely to approve your application, allow you to borrow more, or offer a lower interest rate. So, searching the market could help you reach your home ownership goals.
Searching the market and understanding which lenders could be right for you can be difficult. Working with a mortgage broker could be valuable here and improve your chances of success.
We can make your mortgage application process smoother
As mortgage brokers, we can lend support throughout the mortgage application process. From identifying the lenders that are most likely to approve your application to going through your paperwork, we’ll be there every step of the way. Contact us to talk about your mortgage needs.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 17/04/23