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.
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;
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.
The application criteria may differ from lender to lender, but typically a self-employed person seeking a mortgage will need to provide;
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.
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.
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.
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.
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;
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.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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