If you are self-employed, work on a contract basis, or have an income that is irregular or comes from multiple sources, it will generally be harder for you to get a mortgage than it is for someone who is an employee and can easily prove their income.
A self-employed person is someone who runs their own business and works for themselves without an employer. Directors of small limited companies, although technically employed on a PAYE basis, will generally be classed as self employed when it comes to applying for a mortgage or remortgage.
With over three million self-employed individuals in the UK, the attitude of many mortgage lenders towards the self-employed population is a problem that can affect a large number of people, even though many self-employed people often earn more than a lot of salaried workers.
The problem stems from the fact that the majority of mainstream mortgage lenders require proof of income when assessing a mortgage or remortgage application. Employed people can use their payslips and P60 as proof of salary, but there is no such straightforward equivalent if you are self-employed.
In place of payslips, self-employed workers may be asked to provide audited accounts that show their income over the last three years. However, in many cases, these accounts will not give an accurate reflection of how much money a self-employed person is making. This is because if the accountant who prepared the accounts is doing his job properly, he will have offset as many allowable expenses as possible against tax. This has the effect of reducing the self-employed person’s net profit, upon which the lender will base the size of mortgage or remortgage they are prepared to offer.
The situation is even worse for the newly self-employed, as they may not yet have been trading long enough to have had three years’ worth of accounts prepared.
This is where mortgage lenders who specialise in self-certification mortgages and self-employed mortgages come into their own. These types of lenders appreciate the different and complex working patterns of the self-employed, contract workers, and people whose jobs are seasonal. They are prepared to look at each case individually and assess each mortgage application on its own merits, rather than just applying a series of one-size-fits-all income tests. In many cases, self-certification means that you do not need to supply any proof of income – you just declare what your income is without having to provide any supporting documentation.
In addition, specialist self-employed and self-certification lenders are more likely to offer flexible mortgage products that allow overpayments and underpayments. This is ideal for people whose income can fluctuate throughout the year, as it means you can overpay when times are good and underpay if you’re business is going through a quiet period.
Copyright 2004 David Miles. You are welcome to reproduce this article on your website, so long as it is published “as is” (unedited) and with the author’s bio paragraph (resource box) and copyright information included. In addition, all links to external websites must be left in place.