So one question we get quite a lot is how are self employed mortgages calculated?
Quite simply put it is not as straight forward as a mortgage for someone that is employed (I think I just heard collective sigh of all the self employed people reading this).
It can be more difficult to persuade mortgage lenders to allow you to borrow the amount you are after. However one thing that works in self employed persons favour is that every lender is has a different policy when is comes to how the approach self employed mortgages which is great news as it means even if get a no at one lender it could as easily be a yes with another lender (That is one of the many reasons why you need a good mortgage advisor as we get you that yes quicker *wink wink*)
So in this guide I thought I would breakdown a few different tops :
- How much can you borrow on self employed mortgage?
- Should I use a self employed mortgage calculator?
- Sole Trader mortgage affordability
- Company Director mortgage affordability
- Contract mortgage affordability
Lets get started!
So how much can I borrow if I am self employed?
There is no real set in stone method that every lenders uses to calculate this. If you are employed or self employed and meet the mortgage lenders criteria, you can normally borrow about 4.5 times your annual income.
The 4.5 times your annual income is usually the max most mortgage lenders will let you borrow however do not think all is lost there is some mortgage lenders that will allow you to borrow up to 5 times your annual income. There is even some mortgage lenders out there in the big world that will allow you to borrow 6 times your annual income but again it comes down to knowing who these lenders are and there criteria. If only there was some kind of specialist mortgage advisor that has this know already and could do this for you? I wonder where you could find them?
So as you may have guessed I am saying getting a mortgage advisor who specialises in working with self employed people is the best thing to do as they will be assess your income correctly and know which lender is the best fit. Some lenders for example will want you to have records for over a specific time frame like 3 years where as other lenders only require 12 months.
Should I use a self employed mortgage calculator?
Quite honestly it is probably best to just avoid using any calculators if you are self employed because as I mentioned above when it comes to self employed mortgages every lender has different criteria. So because you use a calculator on one site it does not mean that it matches the criteria of another lender.
The real solution to this probably is to speak to an advisor like me who specialises in working with self employed people to enable them to get a mortgage.
Sole trader mortgage affordability
So for a lender to be able to comfortable with giving people self employed mortgages they first need to establish a persons annual income. So they way most lender will do this is via a well documented history of trading is required.
Most lenders require three years trading history before they will consider the applicants income stable enough to lend on some are happy with two years, and thankfully other will accept sole trader and partnerships on a mortgage with 1 years self employed income.
However it is essential to have an accountant! something that a lot of self employed people take for granted – as when it comes to apply for a mortgage as a self employed person you need your self assessment tax year overview and SA302 documents – as these documents outline the annual turnover, expenses and net income.
I know I can hear all the self employed people saying but an accountant is another expense I need to cover! If your accountant is any good he should be saving you more money than he is charging so get over it your a business owner stump up the cash for a good accountant.
Please explain company director mortgage affordability?
So just when you started to get your head around all of this I go in throw in company director mortgage affordability where everything is all turned upside down. That may have been a slight exaggeration – there is a few slight different to company director mortgages but lucky for you I am hear to explain.
So the most obvious different to a company director mortgage than a self employed mortgages is that most company directors tend to be registered as PAYE employees of the business which then pays out the individual tax free allowances as a salary and then any additional income is then paid as a dividend from the profits.
So the simply truth when it comes to lenders and company director mortgages is that most lenders will only consider salary plus dividends however there is some that will also consider an applicants share of of net profits of money that is left in the business. Which again comes down to why you should use the services of a mortgage advisor as most mortgage advisors will know already which of these self employed mortgages lenders will look at share of net profits left in the business thereby saving you a lot of time and hassle.
It is not uncommon for company directors to have a private pension contributed to by the company before tax is paid, which could be taken as a salary should the company director choose to do so and the happy news is that there is self employed mortgages lenders that are willing to consider a pension contribution as a potential income and add this into the calculations to the borrowers income – your friendly neighbourhood mortgage advisor should know exactly which lenders will do this and which ones to approach.
Being able to use pension contributions as a form of income is particularly helpful to borrows who are looking to apply for the biggest mortgages possible based on self employed income. So instead of changing your plans and potentially missing out on your dream home – speak to an advisor that specialises in self employed mortgages to get you the best deal.
Finally can I use my contractor income for a mortgage?
First off if you made it this far I salute you!
Getting a mortgage as a contractor can be tricky. Mostly due to the self employed mortgages lenders having a lot of different criteria on what exactly defines a contractor which as you probably have gathered dictates how much of a mortgage a contractor can get.
As a contractor you are either a employed person working on a fixed or short term contract or you are a self employed person that works through a main company.
Every self employed mortgages lender is very different and will a different policies on who they will and unfortunately will not lend to and sadly it is usually based on how long you have been contracting for, also how long you have been working in that industry for as well as a host of other reason like if you have had a recent contract renewed or how long is left on your contract.
So as you can see there is a lot of different factors to weigh up when it comes to a contractors mortgage. But do not despair all you contractors out there (That rhymed). There is specialist lenders who in there in the big self employed mortgages world that consider applications from contractors – so again as has been the main point of this entire monologue is that speak to an advisor who knows exactly who will look at these contractor mortgages.
Thanks for reading all of information on self employed mortgages and I hope it has been helpful – the main point to all of this is simply it is really important to get advice from a specialist in self employed mortgages as it will save you time, stress and potentially a lot of money in the long run.
If you are looking to get in touch you can get me on :
0131 358 8231
Or fill out the contact form on the website