Mortgages for Self-Employed
Fox Davidson secure mortgages for the self-employed. We secure finance on a daily basis for sole traders, partnerships and Limited company directors. Our knowledge will ensure we bring you the most cost effective terms for your situation.
How do lenders treat self-employed income?
- Limited Company Director Mortgages – Generally speaking lenders will class you as self-employed if you own 25% or more shares in a limited company. As a result of being classed as self-employed lenders will not accept payslips but will instead look to use income from salary and dividends. As an independent broker Fox Davidson work with lenders across the market that truly understand how a limited company works and we can secure finance using your net profit before corporation tax plus salary. So, even if you haven’t taken all of your profits out of the company, there are still plenty of options.
- Sole Trader Mortgages – Lenders will generally require your last 3 years’ tax returns (in the format of tax calculations and tax year overview forms – available from the HMRC website in the self assessment section) . They will use the net income after expenses. This is the income you pay tax on (before deducting your personal allowance). The net profit figure is of course lower than turnover and that is often frustrating for a sole trader.
- Partnership Mortgages – These are treated in much the same way as a sole trader mortgage. The lender will ask for proof of your share of net profits via tax calculation and tax year overview forms.
How long do I have to have been self-employed to get a mortgage?
Historically mortgage lenders wanted prospective clients to have 3 years accounts to verify that the business could maintain a mortgage, however, times have changed and Fox Davidson secure mortgages for clients with 1 years accounts.
Mortgage lending is all about risk and so it is our job as a mortgage broker to present a case correctly to the lender. Where a client has been self-employed for 1 year we will need to build a case to lend. It will help if you have been in the same profession for a number of years. Perhaps you were employed in your trade or profession for a number of years and then took the leap to become self-employed to enable you to run a business your way and, one would hope, to earn more money.
With 1 years accounts the lenders may restrict the loan to value. Some high street lenders will only lend up to 80% loan to value for a customer with 1 year’s accounts. Typically, we can secure 90% loan to value if you have 1 year’s accounts but with new lenders coming to market all of the time this will change.
As mentioned above lenders will be looking at your net profits for sole trader mortgages and partnership mortgages and for limited company mortgages, lenders will look at salary and dividends. If this is not sufficient we can approach lenders who can look at net profits before corporation tax.
Mortgage rates for self-employed
The mortgage rates for the self-employed are exactly the same as the mortgage rates for the employed. To be clear, self-employed mortgage rates and fees are not loaded in any way and you are not at a disadvantaged if you are self-employed.
All high street lenders will lend to the self-employed on both a residential and a buy to let basis.
There are some very advantageous products on the market for self-employed clients. One such product is the offset mortgage. The offset mortgage will allow a self-employed client to place their tax savings into an account connected to the mortgage which will in turn offset against that mortgage balance resulting in your only paying interest on the net balance.
Self-employed offset mortgage example:
Savings for tax £50,000
You will only pay mortgage interest on the £200,000.
This is an interesting one as many lenders will not look beyond sole trader, partnership or limited company, regardless of whether you have a contract to carry out work through your Ltd company or as a sole trader. Fox Davidson have the knowledge and experience to allow us to place self-employed contractor mortgages with lenders that will use your daily rate (x 5 x 48 to get to an annual figure).
Fox Davidsons’ top ten self-employed mortgage tips:
- Use a qualified accountant rather than a book keeper. Mortgage lenders will only accept proof of income from a suitably qualified accountant.
- Where possible don’t change trading style just before you are about to apply for a mortgage as this will complicate matters.
- Sole Trader or Partnership – If you are about to submit your tax return give a thought about the net profits you will show and the mortgage you will need. Speak to a mortgage adviser to see how your net profits will affect the amount you can borrow.
- Limited company directors – Don’t worry about talking dividends out of your company if you don’t need them. A good broker will use your net profits as proof of income.
- Consider an offset mortgage. You can make your tax savings or retained profits work for you by placing them in a savings account linked to the mortgage.
- Credit Score – For all self-employed mortgages as with any mortgage a good credit score will help you get the most cost effective terms.
- Deposit – The larger the deposit you have the better the interest rate will be. Rates generally improve every 5% of deposit you have all the way up to 40% deposit.
- Get your business and personal bank statements in order. Lenders don’t like pay day loans, gambling and other similar entries.
- Don’t waste time with online comparison sites as their knowledge doesn’t go deep enough and any credit checks done may harm your credit rating.
- Use an Independent Mortgage Broker that can approach the market including high street banks, private banks and building societies as well as specialist broker only lenders. A good broker will place the lending with the right lender, first time.