Self employed or contractor mortgages?
Welcome to our frequently asked questions.
Can I get a mortgage if I’m self employed?
Yes. The self employed have access to exactly the same range of mortgages as employed people do. However, as your self employed income tends to be more variable, it can be a bit more complicated.
What income do lenders look at for the self employed mortgages?
If you’re self employed you will have accounts of some type. These accounts contain lots of different figures which can be quite confusing – turnover, gross profit, net profit etc.
If you are a sole trader or partnership than lenders will use the net profit from your accounts.
If you trade through a limited company then most lenders will use your director’s salary plus either dividends or your share of the company profit after tax.
How many years of accounts do lenders need for self employed and contractor mortgages?
Unlike their employed counterparts, the self employed don’t have a fixed, steady income. Your income will fluctuate depending on how well your business is doing at any given time.
For this reason, lenders prefer to look at your income over a longer period and see what the average is. Most lenders need to see 2 years of accounts for self employed customers.
That said, there are a growing number of lenders who only require one year which really helps if you’re just starting out on your own.
I don’t have an accountant. Can I still get a mortgage?
More and more people are now submitting their own self employed tax returns online rather than using an accountant. This is absolutely fine from a lenders point of view.
In this case, they will need to see your annual tax calculations and tax year overviews which can be printed from the HMRC online portal.
Do I need a bigger deposit if I’m self employed?
This is one of the more common misconceptions when it comes to mortgages for self employed people. The truth is you don’t need any more deposit being self employed than you would if you were employed.
A bigger deposit is generally helpful as it normally means you can get a cheaper interest rate, but most mainstream lenders now offer mortgages with as little as 5% deposit.
Will I be charged a higher mortgage interest rate because I’m self employed?
Another common misconception is that self employed customers are charged higher interest rates or are restricted to a limited range of mortgage products.
Virtually all mortgage schemes are available to self employed customers provided they can prove their income.
I’m a contractor. The company that I work for said I need to set up a limited company so they can pay me through that. Can I still get a mortgage?
Another recent trend in employment is for companies to employ staff on short, fixed term contracts (typically 6-12 months) rather than on a permanent basis.
This is very common in the banking and IT sectors.
From a mortgage lender’s point of view, the fact that you only have guaranteed work for the next 6 -12 months can be a concern given that you are likely to be taking a mortgage for 25 years or more.
Another complicating factor is that most companies that use fixed term contracts prefer employees to work through their own limited company or through an umbrella company, as it is more tax efficient for the employer.
On the face of it this leaves contracts in a bit of a no-man’s land. They’re employed (but only short term) but they have a limited company which means the lenders class them as self employed.
Luckily, a number of mortgage lenders have realised that this is a growing trend and have adapted their lending criteria accordingly.
There are now lenders who can base their lending on your contracted day rate subject to certain conditions.