How to get a mortgage if you're self-employed
If there’s one common conception in the mortgage industry, it’s that borrowing to buy a home while you’re self-employed is very tricky indeed. In fact, mortgages for self-employed people often prove elusive, with lenders asking you to jump through hoops to gain access to borrowing. But just how hard is it to get a mortgage in the UK if you’re self-employed, and is the landscape for those ‘doing it for themselves’ changing?
In this guide, we’ve got everything you need to know about getting a mortgage if you’re self-employed.
What are the self-employed mortgage rules?
There are specific mortgage requirements for self-employed people, which we’ll get to in a bit. But first, it’s worth noting that banks introduced new lending rules in the wake of the coronavirus pandemic. These conditions have made it even harder for those who are self-employed.
Lending criteria has been tightened, with self-employed incomes often more volatile than people in full-time work. Banks are keen to reduce risk, and this has led to a tightening of the purse strings.
Some lenders only provide a maximum of 4.49 times someone’s annual salary, while others require self-employed professionals to lay down a minimum deposit of 40%. While those numbers might not look great at first glance, it’s not all bad news. There are lenders out there ready to offer more favourable mortgages for self-employed people (again, more on that in a bit).
Here’s what you need to get a mortgage if you’re self-employed
Self-employed mortgage requirements in the UK
If you’re trying to get a mortgage as a sole trader or registered as a limited company, you’ll need to meet specific requirements. These may vary between lenders, but the following is a good indication of what’s expected from self-employed home buyers:
- 2 or more years’ certified accounts
- SA302 forms or a tax year overview (from HMRC) for the past two or three years
- Evidence of upcoming contracts (if you’re a contractor)
- Evidence of dividend payments or retained profits (if you’re a company director)
As well as providing evidence of your income, you will also need to prove your identity with the following:
- Driving licence
- Council tax bill
- Utility bills dated from the last three months
- Three to six months worth of bank statement
Self-employed mortgage calculator
You will also need to know how much you can borrow. The best way to go about this involves using a mortgage calculator, which can indicate the mortgage amount you may be able to get. Online calculators usually require basic information, such as the deposit amount, how much you want to borrow and your current yearly income. Just remember that results are only an indication of what you may be able to borrow.
Online mortgages for self-employed
Anyone using an online mortgage lender to borrow funds for their home will still need to meet the standard requirements, but the process is much quicker than if you used a traditional lender. Here at Molo, for example, we offer mortgages entirely online. That means there’s no paperwork or appointments, so you can get your mortgage faster.
We also encourage applications from self-employed people.
Is a 30-year fixed-rate mortgage good for the self-employed?
A 30-year fixed-rate mortgage could be a smart move if you’re self-employed. You won’t need to worry about interest rate increases, as you’re locked in for a longer period. And with the Bank of England base rate at an all-time low of just 0.1%, it’s unlikely to reduce further. In this scenario, the only way is up.
For some people – whether you’re self-employed or not – a 30-year fixed rate might seem like a long time to tie yourself into a mortgage. However, it’s worth remembering that you’re essentially only tied in for as long as you have your home. If you decide to sell five, 10 or 15 years down the line, you pay off the mortgage and move on.
A longer-term fixed-rate mortgage is certainly something you should give thought to before making a decision. As someone who is self-employed, you might prefer the added security of knowing your rate won’t change.
95% LTV mortgages for self-employed
Let’s say you’re buying for£200,000. You’d require a deposit of £10,000 and could expect monthly mortgage repayments of around £900 per month on interest rates of about 3%.
Mortgage deposit for self-employed
A 95% mortgage might look tempting, but it’s not the only option available for self-employed professionals. The higher the deposit you have, the lower your mortgage repayments will be. So it might be worth paying a little more if you can afford it.
Historically, self-employed people have found it easier to get mortgages when they’ve had a higher deposit amount. Having a healthy deposit and a good credit score will help stand you in good stead when getting a mortgage.
How to build credit as self-employed
Credit score for self-employed
A good credit score plays a major role in the mortgage deals available to you – the better your score, the lower the interest rates. Even if you don’t currently have a great credit score, all is not lost. You can do specific things to boost the number and get it moving towards the ‘excellent’ category.
- Making sure your file has the correct information about you
- Paying things like credit cards and utility bills on time
- Not using too much credit
- Being registered on the electoral roll
- Closing unused accounts
- Using a credit-building website to improve your score
Final thoughts: Doing it for yourself with a mortgage
Getting a mortgage as a self-employed person needn’t be a headache. There are lenders out there offering competitive rates and supporting the cause of professionals working for themselves, including Molo. From your point of view, you should ensure you have all the details to hand and understand the requirements with the lender. Then you can think about getting the keys to your new home.
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Submitted in 2021
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