We’ve all been there. Our decision to go self-employed seems to be justified. Business is booming. With it, the freedom we sought is within our grasp. But there’s still one niggle: rent!
Private rent can be the most frustrating aspect of contracting. Knowing that we’ve earned it by our own means, us contractors develop an uncommon affinity with our cash.
To see our hard-earned income succumb to every whim of a landlord can spill over into other aspects of our lives. So exactly how can we ditch the rent book and find a place we can call our own?
Lenders play into the hands of buy-to-let landlords
Private landlords have, to a certain extent, got it made. They know full well that High Street mortgage lenders don’t welcome the self-employed like they used to. They also know there’s a huge shortage of affordable housing.
With private rent now counting towards our credit rating, tenants have no choice but to pay on time, every time. And as landlords put up their rent, saving for a deposit for a mortgage gets evermore unrealistic.
To compound matters, buy-to-let landlords have been propping up the mortgage market in recent times. With lending criteria so tight, they’ve been a lender’s customer of choice compared to borderline-creditworthy tenants. Or even existing homeowners.
Light at the end of the tunnel, for contractors at least
In an odd turn of events, mortgage lenders are beginning to see sense in offering mortgages for the self-employed. Higher earning potential coupled with freelancing at an all-time high, it’s a market they’d be ill-advised to ignore.
The government has helped. By nipping self-cert mortgages in the bud, one may think not. However, one of the recent barriers to entry to the homeowner market, the size of the deposit required, has fallen.
The signs are that mortgages can be secured with as little as 15% or even 10% deposit. Okay, it’s not generally the 5% we became used to before the 2008 banking collapse. But it’s not the 30%-40% of more recent times either.
What can I do to qualify for a self-employed mortgage?
First and foremost, ensure that, if you’re in rented property, you carry on paying your landlord on time. Having a deposit is not the only factor: your credit history is still very much part of the equation.
If it helps you grin and bear the seemingly unjustifiable amount your landlord charges, think of it as a means to an end. It’s not worth this one bad apple souring the burgeoning barrel your business is creating for you.
Build a budget into your business and beyond
Once you’ve been contracting for a while, you get a feel for what we can spend, save and what belongs to the taxman. That “feeling” won’t win over a mortgage underwriter.
Earnings must go through the books even if you’re a sole trader and haven’t yet created a limited company. Those accounts must also show – legitimately – that your business can support itself, you and a mortgage.
Contracting, with its higher than average earning potential, can genuinely make you better off than ever. The surplus cash can even make you giddy. A budget will help you become responsible, whilst simultaneously demonstrating to a mortgage lender your ability to manage your finances.
Having all your expenses down in black and white will also help ensure you’ve not missed something critical that might come back and bite you on the backside. Even if you’ve missed it, the taxman won’t. For instance:
- running costs;
- NICs (employers and employees);
- self-assessment tax;
- professional insurances;
- salary versus dividends (for tax efficiency);
- professional memberships;
- pensions, insurance and investments;
- and many others besides.
A budget should not be seen as a burden. Rather, it’s an opportunity for you to make your earnings go further by teaching you to dispense with frivolous expenditure.
Getting to grips with your cashflow
Learning to budget is one thing. Displaying it in a manner that will warm the stone-cold heart of an underwriter is another entirely. The most profitable contractors hire accountants.
Similarly, accountants should not be regarded as a business expense. For the self-employed, it’s enough to keep up to pace with their specialty and supply their service. Trying to keep up with loopholes and tax advantages HMRC bring in or drop out is a full time job in itself.
We’ve seen many would-be entrepreneurs fail at this stage of their business. They cannot get it into their heads that, by giving the laborious chore of business finance and tax planning to an accountant, it frees up their time to supply more of their product, energy and service.
As much as we all like to think we know our own niche inside out, the best business accountants are the same. They make it their job to maximise your income. This in turn helps you generate more cash to build a deposit a lot faster, bringing the day you can sack your landlord even closer.
Summary: you owe it to yourself to get this right
A self-employed mortgage need not be a distant dream. If you can:
- accept the responsibility of a stringent budget;
- hire an accountant who can help you retain much more of your income;
- and eventually appoint a specialist self-employed mortgage broker who’ll instinctively match your unique circumstances with a relevant lender’s product
you’ll be paying for a property that will eventually be yours (instead of one that never will be) a lot sooner than you could imagine.
Author: John Yerou
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.