Mortgage lenders open doors to self-employed
on offer for self-employed applicants are the same as those available to the employed. It is the application process and the criteria for lending that set the two apart.
The main drawback that selfemployed individuals have been facing is the length of their trading history, with most lenders requiring two to three years’ self-employed accounts/tax returns before considering you to be mortgage worthy. For individuals who have recently changed their employment status, this has proved to be extremely problematic and in most cases has meant they have been unable to obtain a mortgage.
Lenders such as Halifax, Dudley Building Society and Kensington, however, have pioneered a change in this area, accommodating more recent self-employed individuals by accepting applications with just one year’s self-employed history/ accounts. This has proved to be a real game changer.
So how is self-employed borrowing calculated and evidenced?
As on all applications, the lender will run affordability checks taking into account an individual’s income and outgoings. As self-employed income is often irregular and unable to be evidenced through monthly payslips, a different approach is taken depending on your selfemployment type and the lender that is used.
Sole trader – Sole traders are typically a one-man band, who are required to submit their tax returns to HM Revenue & Customs, often by self-assessment. The SA302 form that is produced from this return will be requested by the lender, alongside the accompanying tax year overview, with the profits from selfemployment being used for affordability purposes.
Limited company director – Limited companies are slightly more complicated than sole traders and require full company accounts to be drawn up by a qualified accountant.
Directors typically take a small salary and larger dividend, dependant on company profits, and this will be the figure that most lenders use for calculating affordability.
Share of net profit or retained profit can also be considered by some lenders, with borrowing power often increased through this method if your business profits are higher than your personal drawings. Submission of full company accounts, completion of an account- ant’s reference or SA302’s and accompanying tax year overviews can be used to evidence income, depending on the lenders preference.
Partner in a partnership – Partnerships, as with limited companies, require annual accounts to be produced.
As partners typically have a certain share percentage within a partnership, their share of the overall profit will be used for affordability purposes, so it is important that the partnership accounts clearly show how much each partner is entitled too. SA302 documents may also be requested to further evidence this income drawing.
So, if you find yourself recently self-employed and in search of a mortgage, there is hope yet.
However, it is important that you seek the right advice and guidance from a mortgage broker to ensure that you are placed with the bank or building society that best suits your situation. Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull. Email:tilaw@meritofs.com