Q: I’m self-employed. How does this impact on my mortgage application?April 1, 2016 9:41 am
Adrian Firth, Clayden Financial IFA, answers this question posed by Property Writer, Charlotte Smith-Jarvis (East Anglian Daily Times)
Being self-employed brings many challenges and with 4.62 million people now registered as self-employed, an increasing number are experiencing difficulties in obtaining mortgage funding.
On April 26, 2014, the regulator (the Financial Conduct Authority) introduced new rules for mortgage lenders and advisers in the UK, designed to improve the process of obtaining a mortgage and to ensure they are:
- suitable for the applicant’s needs and circumstances
- affordable for them both now and in the future
In the past some lenders offered self-certification mortgages that did not require proof of income.
The default rates for these mortgages were far higher than normal and, because of the harm caused to consumers, the regulator banned self-certification mortgages when these rules were introduced.
This ban has led to a number of existing self-employed borrowers stranded on high interest rate mortgage schemes.
If you are self-employed seeking a mortgage or remortgage the requirements are more onerous than for employed applicants, who often only need to produce three months’ pay slips and bank statements as evidence of income.
Sole traders will generally need to prove profit before tax. Those who own a limited company will need evidence of their total wage and any dividends.
Some lenders will, where money is left in the company rather than taken as income, take this into account, but others will not.
Most lenders will want to see up to three years’ worth of accounts (or SA302s) and up to six months’ bank statements, so it is helpful if you have these available for review. SA302s provide a brief summary of the income that has been reported to HMRC.
It documents exactly how much income you have declared and is an easy way for a lender to verify that the income on a mortgage application is the same as you have shown to HMRC. They assist if you are unable to provide formal accounts.
As there are specialist lenders actively helping self-employed applicants it is essential you seek professional help from an experienced independent mortgage broker. A number of non-mainstream lenders only require one year’s evidence of income and these schemes may not be available on the high street.
It is also important that independent financial advice is sought in relation to any associated protection arrangements because certain contracts do not adequately cover the self-employed and may not pay out if a claim is made.