Self-employed mortgages have become harder to secure since the credit crunch. That’s no surprise; advisors see most non-PAYE applicants as higher risk.
That said, since easing out of lockdown, lenders have redefined what classifies as risk. Mortgage lending criteria is changing daily for everyone, not just the self-employed.
There are still some self employed friendly lenders: lenders sympathetic to independents. But how do you know who the best self-employed mortgage lenders are?Most High Street banks and building societies target the traditional, 9-5 workforce. That’s because employees get regular pay slips, making them low risk. And since the credit crunch, the lower the risk the better for mortgage lenders.
But it’s far from impossible for self-employed professionals to buy or remortgage a home. Freelancers, contractors and sole traders just need to know the best way to go about it.
The key is to use a specialist broker who:
Let me clarify this before we go any further: there’s no such thing as a “self-employed mortgage”. If you’re buying a home, you’ll get the same type of home loan as anyone else.
But you will have to jump through more hoops to prove your income than a permanent employee. It’s at this stage of an application that brokers prove themselves fundamental to success.
That’s because no two lenders have the same lending criteria. It’s crazy, especially after how strict the market became post credit crunch. But having no one set of rules to determine how lenders calculate self employed mortgages is a fact of life. Simple.
Each lender has its own rules for assessing borrowers’ affordability. And therein lies the problem for independent professionals.
Only those invested in the industry know the intricate details of each lender’s criteria. Underwriters, intermediaries, in-house advisers and brokers fall into that category. But even this can cause a problem.
In-branch staff can only offer the mortgages from their bank’s range. Even then, they may not have access to any specialist lending. This is where underwriters step in, but they’re likewise limited to the bank’s offering.
So which mortgage lenders will best assess self-employed income for borrowing purposes? That’s where we can help.
There is no one lender that we can say is the best for our customers. A lot will depend on your trading structure, history and current situation.
We can give you a generic overview. Most lenders will want to see at least two years’ company accounts, SA302s or tax returns. The more accounts you can show the better. Some will want to see projections, too.
But there are some lenders geared more towards the self-employed populace than others. These self-employed friendly lenders include:
Lenders self-employed directors should avoid:
Halifax will consider self-employed borrowers with less than two years’ accounts. This isn’t common knowledge, but Halifax can be quite flexible towards independent professionals.
If you can evidence future ongoing work, they will look at your application in a better light. This is important as it shows that you can maintain your current levels of income.
If you’ve not got two years’ company accounts, not all’s lost. We’ve helped many self-employed borrowers get a Halifax mortgage with only one year’s accounts.
Virgin Money are great lenders for to Company Directors. Unlike most, who assess affordability using salary and dividend drawings, they use retained profits. Rather, they will if a broker points them in the right direction.
They look first at salary drawings plus net profits (before corporation tax). To work out mortgage affordability, they then use an income multiple of 4.49.
Clydesdale also offer great home loans to Company Directors. They assess affordability like Virgin Money. That is, they’ll utilise net profits (before corporation tax) plus salary.
Worth noting is that they ask for three years’ trading history, then use the last two years’ average. They also use earnings multiple of 5 × (net profits + salary) up to 85% LTV (15% deposit). This is a much higher and desirable ratio than with most High Street lenders.
Coventry will assess affordability based on net profits, too. But they’ll ONLY use profits after deducting corporation tax.
True, this isn’t as good as Virgin Money and Clydesdale. But they will use the latest years profits rather than an average. This method can prove advantageous for Limited Company Directors with rising profits.
Barclays Bank will also use net profits after corporation tax to work out affordability. But they’ll only do so if the director is a 100% shareholder in the Limited Company.
This is will surprise many as they usually prefer to use salary and dividend drawings. Their opening gambit is to ask for at least two years’ accounts to back-up such an application.
NatWest Bank’s self-employed lending criteria works in a similar way to Barclays’. Two years’ accounts is their prerequisite evidence.
And, yes: they’ll use post-corporation tax net profits to work out affordability. But only if the director is a 100% shareholder in the Limited Company.
Like Barclays, they often prefer to use salary and dividend drawings. So you will need to use a broker to point an adviser in the right direction.
Adverse self-employed lenders are those prejudiced towards company directors’ payment structure (but, not sole-traders). These lenders aren’t prepared to use retained profits in their affordability calculation.
Instead, they’ll only use salary and dividend drawings. This is in no way helpful for company directors who work in a tax efficient way. These include Nationwide and Santander.
Nationwide will only use salary and dividend drawings to assess company directors’ borrowing affordability. They won’t utilise net profits or retained profits withheld in a limited company.
Now, most company directors do retain profits this way. This makes Nationwide’s criteria detrimental to their efforts to buy a home. Their calculation calls for two years’ accounts and will utilise the average drawings.
Santander operates in a similar manner to Nationwide. They only use salary and dividend drawings to assess company directors borrowing affordability. Likewise, they’ll ask to see at least two years’ accounts and use the average drawings.
Unsure of which self-employment status is best for getting a mortgage?
Like many before you, you think that you need to change the way you work to get a mortgage. In truth, it shouldn’t matter. We can help the vast majority of independent professionals get a mortgage.
That said, we have produced a guide to help you see what lenders see. Our comprehensive guide, Mortgages for Self-Employed Workers, will put your mind at rest.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.