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self employed mortgages

A Guide to Self-Employed BTL Mortgages

More than five million people in the UK are self-employed, reaping the rewards of more flexible hours, setting your own working conditions, and controlling your financial rewards. However, some believe this can negatively impact your chances of securing a buy to let mortgage. As a specialist buy to let broker, here’s our guide to buy to mortgages for self-employed applicants.

Types of self-employment

Being self-employed means working for yourself and not receiving a salary from an employer. That’s quite a broad definition, so we’ve broken it down a bit further:

  • Working for yourself – This is the largest group, accounting for 68% of self-employed people in the UK.
  • Running a business – 18.7% of self-employed people are running a business of which  they share ownership.
  • Sole director (limited company) – This category is for people who wholly own their registered business, which is a legally separate entity. In the UK, this accounts for 14.3% of self-employed people.
  • Freelancer – Freelancers account for 12.3% of self-employed people, taking work from multiple clients and customers without being formally or legally attached to any.
  • Partner – 10.6% of self-employed people are in a business partnership with 2 or more people.
  • Sub-contractor – 10.2% are sub-contractors, independent businesses that provide a distinct set of services through a contractual agreement.
  • Agency - 3.3% are categorised as an agency, sourcing skills or services for clients within a defined industry.
  • Other – Self-employment is exceptionally varied in scope and industry, with many people taking on a mix of categories and accounting for the remainder of self-employed people in the UK.

Is there such a thing as a BTL self-employed mortgage?

Yes, except it’s just a normal buy to let mortgage! You don’t have to be formally employed to get a BTL mortgage. This is very important for several reasons, from the fact that the size of the self-employment sector is growing every year, to everyone having the right to pursue their investment dreams.

This financing is more accessible because BTL mortgage lenders are primarily interested in your potential rental yield as well as your personal income, credit record and other factors. Lenders must be confident that the rental income will satisfy the rental stress test (often called rent to interest stress test or RTI). A lender’s RTI requires the rental income to cover the mortgage repayments, plus a surplus to mitigate void periods, repairs, fluctuating interest rates, bills etc.

Most lenders also require that you own 20-25% of the business from which you draw your income. If you are the sole trader, you’ll be required to declare your full income. This can be done using a self-assessment tax return (SA302 form), which lenders typically use to evaluate mortgage eligibility. For partnerships, lenders will assess your individual portion of the business, while owners of limited companies will have both their salary and dividends assessed, with some lenders able to consider the profits of the business.

While each BTL mortgage lender has its own individual requirements for self-employed applicants, the actual assessment process isn’t much more rigorous or complex than for PAYE applicants. As BTL lenders are more concerned about whether the rental income will meet RTI requirements, some don’t have a minimum income requirement for borrowers; they just need proof of some income. Even some high street lenders are changing criteria to include no minimum income threshold. Generally, lenders will want two years’ tax returns which is slightly more paperwork than PAYE applicants typically need to provide, but shouldn’t be too difficult for borrowers to produce. A broker will be able to help you collate the correct documentation, guide you to the right lenders and source the most competitive offers.

What documents do I need to provide to mortgage lenders?

So, now that you know that mortgages for self-employed people are available, let’s take a look at the paperwork this process will involve. This may differ somewhat between mortgage providers, but generally includes:

  • SA302 form – This should account for the last two years. An HMRC tax overview can be substituted for your SA302.
  • Profits/dividends account records – Documentation supporting retained profits by the business, as well as dividends you may have received. Lenders typically need two years’ worth to verify cashflow and other factors.
  • Business bank statements – three to six months of business bank statements, evidencing any existing BTL rental income (if applicable).
  • Calculating your deposit

When you are self-employed and looking to get a BTL mortgage, it’s best to have as much support for your income as possible to give lenders the clearest idea of your financial situation. If possible, it’s also a good idea to put down a strong deposit. This is because this both reduces your loan amount (and thus your monthly payments) and ensures you have an asset that lenders can use to recuperate the money owed to them. Generally, for a buy to let mortgage, applicants need to be able to put down a deposit of 20-40% of the property’s value. Typically, 25% will get you access to the majority of competitive mortgage interest rates.

  • Using retained business profits

Money retained within your business (to be used for a deposit or as your income) is considered by most lenders. If you are considering this route, a broker will be your best chance to connect with a lender willing to consider these assets and work with your business’s accountant directly to assess business growth and the viability of using these in a self-employed BTL mortgage eligibility process.

  • Increasing your eligibility

You can work to increase your eligibility for self-employed mortgages and present the most sound case to lenders. This includes: 

  • actively saving towards the deposit
  • checking the stability of your credit record and improving it where possible 
  • choosing a low-risk and high-yield property for your portfolio 
  • it’s also advisable to register on the electoral roll.

Remortgaging when you're self-employed

When remortgaging an existing property, you can expect to go through a similar process with similar criteria to applying for a self-employed mortgage. This will include assessing the property’s current market value, the equity you have in it, and more.

Dos and don’ts of self-employed mortgages

Do...

  • Get your accounts up to date.
  • Plan for the largest possible deposit, keeping in mind that required deposits are usually 25-40% of the property value.
  • Bring in additional forms of income. This can include having your spouse’s income or marital assets support the loan, selling underperforming assets, etc.
  • Use an independent mortgage advisor. A BTL mortgage broker has the experience and network to not only guide you through the process to ensure the best possible results, but also to find the most competitive and advantageous loan offers.

Don’t...

  • Forget to prepare. Being able to support your case with confidence and the paperwork to back it up is essential.
  • Don’t change your business structure, as this will impact assessment criteria. If you have recently changed this (eg moved from being a sole trader to a Limited Company), you may need to wait for at least a year before you are eligible for a mortgage.
  • Forget that self-employed mortgages exist and can be straightforward to obtain with the right mortgage broker guiding you!

What happened to self-certification mortgages?

Self-certified mortgages, or self-cert mortgages, allowed people to borrow money without providing formal proof of income – but the 2007-9 financial crisis changed that. Many people were granted these mortgages and charged a higher interest rate for not having to prove their income and were devastated when the economic crash occurred – devaluing their assets while keeping the payments constant. As a result, the Financial Conduct Authority (FCA) disallowed this type of financing.

This is no bad thing, especially for the ethical and reputable mortgage lenders that our brokers work with. The modified self-employment mortgage required lenders to include more extensive proof of income in their process, ensuring mortgages for self-employed people are both the lender and customer’s best financial interests.

How do I calculate a BTL self-employed mortgage?

A self-employed mortgage calculator uses several factors to give you an idea of the loans and loan products you would be eligible for. This is best completed in person with the assistance of a broker, but the information you will have to provide include:

  • If you are purchasing or remortgaging a property
  • The value of the property and/or mortgage amount
  • If you are the sole applicant or not (if not, how many other applicants?)
  • Employment status and length of time spent in this role
  • If your taxes are up to date
  • Any substantial changes in net profit
  • Latest year’s net profit

You can get a much clearer idea of how much you can borrow by using our BTL mortgage calculator or consulting with a broker who can get to know your case and put their expertise to work to get you the best deal.

If you need a self-employed BTL mortgage in the UK, we’re your team.

At Mortgages for Business, we know what it takes to get a buy to let mortgage, and we’re here to help you make your investment potential a reality. Start the journey towards a more diverse and rewarding portfolio with our team of experienced, independent brokers. With over 30 years of expertise, we’ll work tirelessly to deliver an affordable, ethical, and competitive buy to let mortgage.

Submit an enquiry today or give us a call on 0345 345 6788.

 

Data sources: Office for National Statistics.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE