There’s a perception that securing a mortgage as a self-employed borrower is challenging. Consultant mortgage broker, Chris Unwin, explains where the complexities occur and how to overcome them.
A survey by Aldermore revealed that 37% of self-employed people don’t think they will ever be able to buy their own home, and 28% believe it’ll take more than ten years to do so. These are significant figures and paint a very bleak picture of home-ownership prospects for anyone running their own business. But is it really as challenging as everyone thinks?
There’s no denying that securing a mortgage when you’re self-employed can be more complicated than for those with a PAYE income. However, I think there is a general misunderstanding about mortgages which further complicates individuals’ experiences of the process. Aldermore’s research found that, of those who’d applied for a mortgage, 32% cited being self-employed as the number one reason for rejection. The truth is, no lender would reject an applicant simply because they’re self-employed, as they all have policies and criteria in place to account for self-employed income structures. In reality, I suspect the actual underlying reasons for these rejections is because applicants can’t demonstrate their earnings in a way that satisfies underwriters, or they haven’t been trading long enough to have the required set of accounts.
Drawing-Down Self-Employed Income
How you draw income plays a significant role in a borrower’s ability to secure a mortgage. The majority of lenders only accept income physically drawn down from the business as salary or dividends. This is fine if the income amounts satisfy the standard 4.49x income multiple lenders use to calculate affordability. Furthermore, most lenders require a minimum of two years’ tax calculations and overviews to verify the income levels. Some also request three to six months business bank statements to demonstrate current trading activity. A small handful of lenders only require one-years’ accounts, but you’ll need a broker to access the majority of them.
For tax purposes, many self-employed individuals only draw down enough to cover everyday living expenses and leave the remaining profits in the business. In this case, borrower options are limited but not impossible. Some lenders will accept a share of profits after tax and salary, but you’ll need an accountant to certify the figures.
The income multiple calculations used to determine how much a person can borrow is the same for self-employed applicants as PAYE borrowers. As I’ve said, the standard is currently 4.49-4.75x; however, for higher earners (£50,000+), some lenders will stretch to as much as 5.5x (the threshold varies depending on the lender). It’s important to understand that income multiples depend on overall affordability, which will be impacted by committed expenditure and age. The reason lenders primarily look at your annual income is because they understand that monthly income for the self-employed is not necessarily consistent, so they’ll work out an average.
Impact of the Pandemic
It’s true that the economic impact of COVID-19 negatively impacted many self-employed applicants experience of securing a mortgage. Most commonly, income levels have been affected, particularly during periods of lockdown. Additionally, those who required Government financial support in the form of Bounce Back Loans (BBL) have found this to be a significant roadblock when applying for mortgages. In these instances, lenders need to see that trading has stabilised for six months and will often request an accounts certificate to verify previous income and indicate future sustainability. However, some lenders (mainly smaller building societies) categorically will not accept income from a business that has received a BBL. Other lenders have adapted to a case-by-case assessment in these circumstances. Essentially, you should expect a more thorough assessment of your finances than you may have experienced pre-COVID.
Give Yourself a Stronger Chance
As you can see, securing a mortgage with self-employed income is a more complex process, but not impossible. However, using an experienced mortgage broker really will give you the best chance. We understand how lenders work and what they look for, so we can package up your application in a way that is going to highlight your strengths as a borrower. We can also access a lot of lenders that borrowers cannot apply to direct, so you get more choice!
If you want to know more about getting a mortgage as a self-employed borrower, get in touch with me, Chris Unwin on 01625 416394, or email me, firstname.lastname@example.org, and I’ll be happy to help!
Source: Mortgage Strategy/Aldermore.