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Self-Employed Remortgaging Guide

In recent years, more of us are choosing to become self-employed.  Certain industries such as journalism, IT and translation services now use self-employed contractors/freelancers as the norm.

However, getting a mortgage as a self-employed person (formally known as a self-certification mortgage) poses more of a risk to lenders than employed applicants.

This means that it can be harder to get a mortgage if you choose to become your own boss, but only in terms of the application process. You are not prevented from getting a good rate or flexible options, just because you work for yourself.  

This guide will take you through the process of applying for a mortgage as a self-employed individual.  

Why is it more Difficult to get a Mortgage when you’re Self-Employed?

Before the 2007 financial crisis, the lending criteria for many mortgage providers was more lenient than it is now. In fact, getting a self-cert mortgage back then was easy, as you did not have to prove your income. Self-cert mortgages were often known in the industry as ‘liar loans’ because of the tendency for people to exaggerate their earnings to secure a higher mortgage.

However, in 2014 a Mortgage Market Review was conducted to make sure that tighter regulations were placed on lenders. This was to ensure that a loans crisis of the same magnitude as the 2007 crash, could not happen again.  

Why do Some Lenders Reject Mortgage Applications from the Self-Employed?

Self-employed people can apply for a mortgage of any type, however, not all lenders will accept their application. This could be for any of the following reasons;

• Not the right business - Your business may not be on the lender’s list of preferred professions.
• Too much paperwork -The provider may not have the infrastructure in place to examine your business model in enough detail. They may prefer ‘easier’ applications from employed workers, where less background checking is required.
• Not enough experience -The applicant may be quite new to the self-employment game and needs more time to build up a provably successful business model.
• Sudden increase in earnings -Accounts which show a sudden spike in earnings can also ring alarm bells to lenders. Many of us may see increased earnings as a positive indicator of credit worthiness, however lenders may be warier. They may interpret a sudden uptick in income as a pre-emptive step in securing a mortgage, perhaps before the applicant is truly ready to demonstrate that their business is a long-term success.
• One bad year - Your mortgage affordability assessment may take the figure from your worst performing years, regardless of how big your business may have grown in the time since.
• Wrong qualifications - Some lenders will only accept your application if your accountant is certified or chartered.
• Industry switch - Some providers prefer applicants that stay within the same industry when they switch to self-employment. They may deem those who completely change their profession as more of a risk, as they may not have enough experience within their new industry.
• Questions of affordability- Directors of limited companies, who pay themselves a small salary and keep profits within the business, may pose a challenge to lenders. Providers may struggle to determine exactly how much money the individual can afford to borrow. If this is the case, directors can approach a mortgage company that specialises in cases of retained profits.

Read more in our Guide to Applying for your First Mortgage, if you would like more information on what providers are looking for when approving mortgage loans.

Who is Eligible for a Self-Cert Mortgage?

• Sole Traders - One-man-bands who run their own business and keep all the profits.
• Partnerships- Those who are partners in business will be assessed on their individual share of the profits.
• Directors of Limited Companies – This is where the business is separate from the director’s personal finances. They may pay themselves a basic salary, plus dividends.

What Paperwork is Needed to Apply?

The application criteria may differ from lender to lender, but typically a self-employed person seeking a mortgage will need to provide;

• Two years’ worth of accounts showing profits/shares of profit earned and dividends (if applicable). Some lenders may require three years and others may accept less than that, if you can prove you have a good pipeline of future business.
• Unique Tax Reference (UTR) and NI number.
• Proof that you use an accountant.
• SA302 forms, for those who file self-assessment tax returns.
• Proof that you have a sustainable business model – you may need to show a list of regular clients, for instance.

Please note: If you are employed and carry out self-employed work on a part time basis, you may also need to provide the above documentation in your mortgage application.

How Much Can I Borrow?

Each lender will run their own affordability checks, but generally they will base the decision on your company’s average profits over two or three years. Like with a normal mortgage, providers will run a ‘stress test’ on your business, to determine your mortgage affordability in times of financial difficulty. 

Please note: If you have an existing mortgage and you would like to refinance as a self-employed individual, your existing lender may be able to help you, as they already know how successful you are in making payments and your credit history thus far.

Tips for Enhancing Your Mortgage Application as a Person who is Self-Employed?

• Hire a certified or chartered accountant before you apply and ensure your records are up-to-date.
• Understand your business so that you can explain what may have caused any dips or boosts in your profit margins.
• Don’t forget to do all you can to improve your spending habits and credit rating, as your application won’t be solely based on your business’ profitability. Read more in our Guide to Improving your Credit Rating.
• Private banks may be a good avenue for those seeking mortgages over £500,000.
• If you are a company director, try not to minimise your income too much to avoid tax, as this may negatively impact your mortgage application.
• Save for a larger deposit if you have only been in business for a short time. Aim for 20%, if you can.
• Speak to a financial advisor who can help you make your application and point you to lenders who specialise in granting mortgages for self-employed people. Namely, lenders who use underwriters/business development managers to assess applications.

How to Remortgage with a Self-Cert Mortgage

If you took out a self-cert mortgage before 2007, you may find it difficult to remortgage, as the terms for lending will not be the same as they were in the pre-regulation years. This means that if you did things like writing off a large chunk of your profits as expenses, thus lowering your declared income, you may find yourself in a ‘mortgage trap’.   This is where you cannot find a comparable mortgage to switch to, you may be therefore stuck on a high standard variable rate.

Let’s Look at an Example:

Tony took out an interest only, self-certification mortgage in 2006. He has never missed a payment and has a good credit rating. His ten-year fixed period ended and he has been put on the lender’s SVR rate of 5.5%. He knows that this is not the most competitive rate, but after approaching his lender, he has been told that he cannot switch. Tony would need to pass the lender’s stricter criteria, which he knows he cannot do.

Tony is therefore ‘trapped’ in his existing mortgage.

Was My Self-Cert Mortgage Mis-sold?

As discussed previously, in the years before the financial crash, lending criteria was less strict than it is today. There have been reports that lenders would sometimes ‘fast-track’ self-certification mortgage applications and approve lending without adequate affordability checks.

In the wake of this, lenders have been asked to allow special dispensation to existing borrowers who may be caught in a ‘mortgage trap.’ If something similar has happened to you, you may be able to approach your existing lender and get them to consider your case as a ‘transitional arrangement.’ This is where existing affordability checks can be wavered and a new deal offered to you if; 

• You don’t wish to borrow any more funds towards your mortgage.
• You have kept up with repayments and have a good credit rating.
• Your earnings and circumstances have not changed.

Please note: Not all lenders will allow a transitional arrangement for their customers. These tend to be available to lenders who conduct manual lending checks, using underwriters.

The old days of ‘liar loans’ may be behind us, but there are many lenders in the UK market who deal with self-employed mortgage applicants. An independent mortgage advisor can help you find the best deal for your needs, speak to an advisor now.