How do mortgage lenders view self-employed mortgages?

As the end of another tax year draws to a close, we have seen an increase in the number of enquiries from self employed people looking for a mortgage as they look to forward plan.

It’s no secret that sole traders, limited company directors and contractors can find it difficult to get a mortgage when compared to those who are employed.

The reason for this is basically being treated as a higher risk. It can even count against somebody who has been prudent in minimising their tax bill as this can lead to ‘insufficient income’ for a mortgage. This is especially frustrating when affordability is more than comfortable.

Such issues can lead to people not getting the mortgage they need or even paying more tax than necessary in order to show an ‘acceptable’ level of income.

Fortunately, there are some lenders who will take a common sense view when it comes to independent professionals.

For sole traders looking for a mortgage, lenders will tend to look at tax calculations backed up by tax year overviews.

Issues can arise around key areas such as –

  • Trading period
  • Fluctuating earnings
  • Taking an average

The good news is that there are lenders that will consider –

  • 1 year’s trading
  • Looking at the latest year’s income (as opposed to an average)

For limited company directors looking for a mortgage, lenders tend to look at salary and dividends. However, this can be restrictive if the directors have retained profits in the business for tax efficiency.

The good news is that there are lenders that will consider –

  • Company profits (before and after tax)
  • Consider the latest years accounts (as opposed to an average)

For contractors looking for a mortgage, some lenders will try and pigeon hole by applying criteria for either employed or self employed people. For contractors on a daily rate who need a mortgage, neither of these approaches will be beneficial.

The good news is that there are lenders that will consider –

  • Lending based on the value of the contract (day rate)
  • Consider new contractors (aka day one contractors)

There are also those clients who have switched from being a sole trader to a limited company. Although this is usually viewed as a positive move due to tax efficiency, some lenders take a dim view of this and require a certain trading period.

Fortunately, there are some lenders that adopt a common sense approach and do not see this as an issue.

The most important thing is to forward plan as much as possible. By speaking to your accountant (if you have one) and a mortgage broker who specialises in self-employed mortgages, you can plan in advance to ensure you get the right solution in the most tax efficient way.

The good news is that there are mortgages available for self employed clients and there are many different options available for many different circumstances.

The key is specialist and independent advice to find the right one. Failing to plan is planning to fail so it’s vital speak to a specialist adviser who can get you the self employed mortgage you need, tailored to your individual circumstances.