Nobody said that being self-employed, or working for yourself, was easy. For good reason, too.
Not only do you have the challenges of running a business, dealing with staff, keeping customers and clients happy, while finding new ones, every now and then a spanner gets thrown in the works. For example, seemingly unconnected financial matters, such as your mortgage, can be affected by being self-employed, running a business, or working for yourself.
Lenders often perceive the self-employed, business owners and some company directors to be higher risk, because:
- Their income might not be as stable as someone in employment
- Their business may not have a particularly long track record
- They could go bust
This, of course, may not be true. Your business may be truly flourishing, and your income could be as stable as any employed person. Regardless, lenders still view the self-employed and business owners differently to people who are employed, often making it difficult to get accepted for a mortgage.
However, there are things you can do to improve your chances of being accepted. Here are five:
1. Keep your accounts in good shape
As a rule, you will need to show the lender your accounts for the last two years. Whilst a small number of lenders do take on those with a one-year track record, your choices will be limited, which could push up the interest rate you pay.
Your accounts will need to tell a positive story. No lender will want to take on a business that appears to be struggling, for your sake as well as theirs.
Whilst many self-employed people, as well as business owners, are programmed to do things themselves, this is a perfect time to enlist help. Having an accountant prepare your accounts will give the lender more confidence. A chartered accountant is a bonus for some lenders, but a necessity for others, so do your research beforehand.
2. Focus on net profits
If you are employed it is easy for a mortgage lender to see what you earn.
The picture for a self-employed person, or someone running their own business through a limited company structure, is less clear. For example, people trading under a limited company umbrella may pay themselves a relatively small salary, topped up by dividends. Some lenders will be comfortable with that approach, others less so.
Furthermore, many self-employed people, as well as those who run their own business, will know that paying themselves only enough to live on is often beneficial, for reasons such as:
- Tax efficiency
- Cash flow
- Rainy days
If you take this (very sensible) approach, some lenders may consequently reduce the amount they will lend to you.
There are alternatives though. Other lenders will focus on your net profits and not the amount you withdraw from the business.
The key thing to remember is that every lender will treat the self-employed and business owners differently. Where one might want to see high levels of income, another will focus on net profit. The tricky thing is to understand which does what; that’s where a knowledgeable, experienced and independent mortgage adviser, who can access the whole of the market, comes into their own.
3. Save up a substantial deposit
The larger the deposit you have, the wider your choice of lenders will be. This is true for every borrower, but particularly so for the self-employed and business owners.
Not only will a large deposit increase your chances of being accepted in the first place, it will also work wonders for your interest rate.
If you only have accounts for one year and your deposit is looking a little thin, there may still be options available to you. However, it may be worth waiting. The time taken to build your deposit bigger and amass a longer business track record, may put you in a much better position to get accepted on a more competitive interest rate.
4. Keep a clean record
If you are an employee, a good credit history is important. It is even more so if you are self-employed or run your own business.
It isn’t the end of the world if you have a few things on your record that you’d rather forget. It just means that you will likely get a better rate, and you’ll have a wider choice of lenders who are willing to accept you.
To read about the differences between credit score, credit history and a credit check, read our in-depth article here.
5. Don’t lose hope and take advice
Whilst getting accepted for a mortgage if you’re self-employed or running your own business can be trickier than if you are employed, it’s definitely not impossible.
Gone are the days of self-certification mortgages, where a person wouldn’t have to declare their earnings. Probably for good reason, too. The last thing a lender wants to do is take away your home, but that’s what will eventually happen if you are unable to keep up your payments for any reason.
If you are self-employed, work for yourself, are a company director or own your business you are probably short on time. It’s also unlikely that you are a mortgage expert, with an intimate knowledge of each lender’s requirements. That means expert advice, from an independent mortgage adviser is worth its weight in gold. Not only will it save you time, it will also increase your chances of your application being accepted.
Our team has helped countless self-employed people and business owners get accepted for a mortgage. If you are moving house, looking for a remortgage or even want to invest in property, don’t hesitate to get in touch on 0800 612 8099 or complete our online enquiry form by clicking here.
If this piece has been useful, keep a keen eye out for a more in-depth guide. We will be expanding on the subject of mortgages for the self-employed and providing more tips on how to get accepted.