The complete self-employed mortgage guide

Owning your own home is an ambition for many people. But the process can seem more daunting if you work for yourself. Our research (in collaboration with specialist providers CMME) revealed three quarters of freelancers worried about the difficulty of borrowing to buy a property. But our complete self-employed mortgage guide can help you to navigate the path to home ownership.

With around 4.1 million people in the UK working in a solo self-employed role, you may be looking to buy a home as a contractor, freelancer, or the director of a limited company. Or it may be time to re-mortgage, or invest in a buy-to-let property.  In all of these cases, it’s not impossible to secure the lending you need, even if you may need to go through some extra steps. 

In the past, it was possible to take out a self-certification mortgage, which were originally designed for the self-employed. However, these were discontinued  in 2014 due to concerns about borrowers taking on unaffordable debts. This means you’ll either need to deal with mortgage providers directly, or work with a specialist broker.

Similar to many other aspects of self-employment, preparation and perseverance are key to securing the right mortgage deal. Especially with the housing market and lending rates subject to constant fluctuations. As a result of the potential increases or decreases, and differences between the requirements of specific mortgage providers, any financial figures provided are for guidance only.

Whenever you’re applying for any type of lending, it helps to have a good credit score and minimal debts. You can check your current rating via various providers including Credit Karma or ClearScore for free, along with advice to help you improve your score. It also means you can check for any mistakes which could impact your borrowing.

Try to avoid any hard credit checks before applying for a mortgage. Soft footprint credit checks, such as searching your own report, won’t be visible to companies or impact your score. But if you’re applying for loans, utility companies or a pay-monthly mobile phone contract, hard or multiple credit checks may lower your rating, and will be visible to lenders. Most will remain on your credit report for 12 months.

Reducing your current debts and obligations will also help you find the best deal from mortgage providers. We’ve shared some useful tips on how to save money as a freelancer, and managing personal debt when you’re self-employed.

It’s become very difficult to find a low, or no-deposit mortgage, due to changes in house prices and interest rates. Typically, these are rare, and reserved for existing customers under specific conditions, or with the help of a family member willing to offer their own home or savings as security against the loan.

With the most common low deposit deals starting at 10%, you’ll need some savings available. Typically lenders won’t require a higher deposit from anyone self-employed, but during the Coronavirus pandemic, they did amend policies due to external factors. Checking the current property market and lending requirements, or speaking with a specialist broker will help you understand how much you need as a minimum, and whether it’s worth building up your deposit amount to access better deals.

You can also get advice on the type of property you’re looking to purchase, as lenders are less enthusiastic about mortgages for old or unusual buildings, or flats above commercial premises.

Any home purchase will involve plenty of paperwork, so the more you can prepare in advance, the less likely it is to hold up the process. Make sure you’re on the electoral roll, and that you have all the evidence required to your identity and income. This includes past bank statements and utility bills along with your passport, driving licence, and business accounts (depending on whether you’re a contractor, company director or working through an umbrella company). And you may need to ensure your financial records are prepared by a qualified accountant.

Be prepared to be asked about your business and personal financial records, whether that’s a dip in income or how much you spend on childcare or socialising. And if you have upcoming projects or contracts already in place, having written evidence can help you reassure mortgage lenders, or you may be able to persuade current clients to confirm ongoing commitments. Or you may want to start raising your daily rates in preparation for applying for a self-employed mortgage.

The biggest reason that a self-employed mortgage may be more challenging is that your income may be more unpredictable than if you’re in employment.

As a result, you’ll need to provide:

• Two or more years’ certified accounts (as a sole trader, Company Director or in a partnership)
• SA302 forms or a tax year overview (from HMRC) for the past two or three years.
• Evidence of previous and upcoming contracts (especially if you’re a contractor).
• Evidence of dividend payments or retained profits (if you’re a company director).

Most lenders will prefer accounts prepared by a qualified accountant. If you’ve been trading or contracting for 12 months or less, it can still be possible to find a mortgage provider who will accept the information you have. But it’s worth remembering that your first year in business may show lower earnings or have incurred more start-up costs, so your borrowing potential might be lower.

If you plan on trying to secure a mortgage with less than 2-3 years of accounts, you might choose to declare less expenses. This will improve the amount you may be able to borrow, but you should talk to an accountant before making any decision.

In addition to your main income, the other paperwork required for a mortgage includes:

• Passport and/or driving licence.
• Your address history for the last 3 years.
• Council tax bill from the last 11 months (it needs to be for the current tax year).
• Utility bills dated within 3 months.
• Bank statements for the last 6 months.
• Proof of any other income (pensions, benefits, etc).
• Details of any existing financial commitments, including current mortgages, loans, or credit card debt.
• Proof of your deposit
• An up-to-date CV

Finally, contractors will need to provide proof of upcoming contracts, while company directors will need evidence of dividend payments or retained profits. If you’re working as a contractor under an umbrella company, you may be asked to provide the latest month of payslips.

Generally speaking, you’ll be able to access the same products for a self-employed mortgage as anyone else. Whether you’re looking to buy your first home, invest in a rental property, opt for a fixed rate or interest-only deal, relocate or re-mortgage, it’s all possible while still running your own business.

• Repayment and interest-only mortgages: With a repayment mortgage, you’ll pay off some of the capital amount as well as interest over the set term. This builds equity in your property allowing you to own your home outright, and is the most common option.

  The only exception is a specific interest-only mortgage, which doesn’t put any repayments towards the capital you’ve borrowed. Instead, you’ll have to repay that loan at the end of the period. This means you pay lower amounts each month, but will need to find a lump sum to purchase the property, and your payments won’t decrease over time.

  Some lenders do offer part and part mortgages, which allow you to repay some of the capital amount over the term of the agreement. This means you’ll pay a lower amount each month, but the final settlement will also be smaller than with a full interest-only mortgage.
   

• Fixed and variable rates: A fixed rate mortgage will offer a set interest rate which won’t be changed for a period of typically 2-5 years. During that time, you’ll effectively be locked into that deal, which means paying exit fees if you leave, and missing out on any benefits from falling interest rates.

  Variable rate mortgages can increase or fall at any point due to the Bank of England’s base interest rate and other factors. Within this category comes various types of mortgages, including standard variable rate, tracker, discount and capped rate. And it’s important to understand what each will involve before committing to the right deal.
   

• Offset mortgages: If you have a significant amount of savings, it’s possible to offset that amount against your mortgage, reducing the amount of interest you pay. The money that you use won’t earn interest, but also won’t be liable for tax. So, it can offer an additional benefit if you’re a high bracket tax payer, and help to repay your mortgage over a shorter term.
   
• Flexible mortgages: These offer greater freedom to overpay amounts to reduce the balance, or underpay (typically subject to approval and previous overpayment). You may also be able to have interest calculated daily to include payments immediately (rather than monthly or annually), utilise payment breaks, or even borrow back money you’ve previously paid towards your mortgage.
   

• Remortgaging: Whether you want to find extra money or potentially save large amounts with a better deal, remortgaging is a possibility when you’re self-employed, including if you’ve switched since taking out your original mortgage.

  In addition to the same documentation as a new application, you’ll also need a mortgage settlement figure from your existing lender. And to check whether there’s a penalty incurred by switching before the original agreement ends.

  Even if you’re not planning to move, organising a mortgage review with a specialist in self-employment can reveal substantial savings as property prices increase, and your Loan To Value (LTV) on your home is reduced.
   

• Buy to Let: A popular investment strategy for contractors and the self-employed is to opt for a buy-to-let mortgage on a property which can then be rented out. Most lenders will require a minimum 25% deposit. 

  You may decide to invest as an individual or your business, and it’s important to consider tax implications along with the normal concerns of landlords including rent, maintenance and finding tenants.

When working out how much you can borrow for a self-employed mortgage, the figure given generally for most mortgage lenders is between 4 and 4.5 times your annual salary. But this varies between different providers, and is impacted if interest rates, house prices, or the UK economy changes significantly.

Various mortgage companies and websites offer basic online calculators to give you an idea of your borrowing potential (for example, CMME), but you should always speak to a specialist advisor for a more accurate and detailed quote. Especially when you’re self-employed, as the amount you will be able to access won’t just be based on your average income.

Other factors which will impact your borrowing amount when you’re self-employed include:

• The length of time you’ve been self-employed
• Income vs monthly expenditure
• Any outstanding debts, including those of your business.
• Which mortgage providers you choose
• Regular customer/client contracts

Many freelancers find they can get better offers and larger amounts by going through a specialist broker. But it’s also important to calculate affordability for yourself, as you may decide to borrow and invest less than the maximum borrowing amount based on plans for you, or your business.

The unpredictability of self-employment can be mitigated with cover for injury, illness, contract failure or end client failure (all included in an IPSE Plus membership), but you still may wish to leave yourself some headroom when it comes to borrowing for a term of 25 or 30 years.

If you’re self-employed and working from home, then there are a range of related expenses that you can claim against your tax bill each year. But are you able to include your mortgage?

When you rent a property and use your home as an office, the amount is taken as a percentage of your total rental cost. And the full price of a rented office space is claimable, as it’s ‘solely and exclusively’ for the purpose of your business.

But if you have a mortgage on your property, the allowable expense is only taken from the interest portion of your mortgage, and not the total amount.

To work out how much you may be able to claim, you’ll need to calculate how much you’re paying as interest. This is done by dividing the total repayment by 100, and then multiplying by the interest percentage.

You’ll then need to calculate the office use by dividing the hours in your home office by the total hours in a month (720), to find the percentage you can claim of that interest.

For example,

A monthly repayment of £1000, divided by 100, and then multiplied by a 5% interest rate would equal £50 of mortgage interest paid each month.

Working 9-5pm at home from Monday to Friday would equal 8 hours per day, and across an average 22 day working month, this would total 176 hours. And there are 720 hours in a 30-day month.

So, 176 hours worked, divided by 720 total hours, multiplied by 100 would be 24.4%.

Finally,

The £50 interest amount divided by 100, and then multiplied by 24.4 for the percentage of business use would let you claim back £12.20 per month for your home office. Or £146.40 per year.

When you’re buying a property, there are various additional costs involved which you may not have considered. It’s possible to have some of these amounts added to your mortgage, or you might choose to pay them upfront to reduce the borrowing amount.

Arrangement fees

Also called a product or completion fee, it’s charged by a lender for setting up your mortgage and will vary depending on the deal chosen, rates and provider.

Valuation fees

Any mortgage lender will want to check that the property you’re borrowing on is worth the amount you’re intending to pay. Otherwise, they’ll lose out in the event of a repossession, for example. So this is a fee for a chartered surveyor to assess the building on their behalf.

Legal fees

The costs for solicitors or conveyancers to carry out legal aspects of the process.

Stamp Duty Land Tax (SDLT)

The rates are different if you’re buying additional properties, or purchasing as a company, but you pay 0% stamp duty on the first £250,000 of a property, or if the total cost is under that amount. At the time of writing, the rates rise as follows:

• Up to £250,000:  0%
• The next £675,000 (the portion from £250,001 to £925,000): 5%
• The next £575,000 (the portion from £925,001 to £1.5 million): 10%
• The remaining amount (the portion above £1.5 million): 12%

These are constantly subject to change, so it’s important to check the current rates for Stamp Duty Land Tax via the Gov.uk website.

Additional Buy-to-Let fees

If you’re intending to rent the property you’re purchasing, there are additional costs for landlords which include the fees included in letting the property (e.g. carrying out an inventory, drawing up tenancy agreements and obtaining references), along with safety and maintenance requirements including ensuring you meet electricity and gas regulations.

Some landlords set up a limited company with restricted trading specifically set up to buy and rent properties, known as a Special Purpose Vehicle (SPV). Taking this route can add costs including setting up the company and accountancy fees.

Stamp Duty rates are also usually higher if you’re buying additional properties, rather than your main residence. So it’s important to check the latest amounts.

Securing a mortgage to invest in a buy-to-let property will typically require a higher deposit than if you’re looking for a home. But it’s seen as a reliable way to earn a relatively passive income, due to the demand for rental accommodation, and the general increase in house prices over time.

The additional consideration is the projected rental income. Most lenders will want this to cover mortgage payments by between 125-145%, which can be demonstrated in writing by an ALRA-certified letting agent. Choosing a low-risk and high-yield property will increase your eligibility with mortgage providers.

Joint mortgages and products allowing up to four investors are available for Buy-to-Let investments, but the borrowing amount may not increase substantially, as the rental income is the deciding factor. Buying via a Special Purpose Vehicle (SPV) may be worthwhile due to the potential for significant tax savings over the longer term.

You’re also able to swap from a residential mortgage to a buy-to-let option, normally by using the new lending to pay off the former debt and start afresh on new terms.

Anyone considering becoming a landlord should research the additional responsibilities and costs, and speak to a professional advisor before proceeding. If you’re self-employed, it’s important to understand the implications for tax. And if you’re planning on sharing the mortgage with other investors, it’s particularly important to have a clear and documented agreement in place.

As with your existing business, landlords can claim an amount of property rental income tax free, with the ‘property allowance’ currently set at £1,000. And you’re allowed to claim tax deductions for specific expenses including fees for letting agents and accountants, maintenance and repairs (but not improvements), and other costs.

The rules for tax and expenses do change for residential, holiday or commercial properties, or if you decide to purchase the property via a company rather than as an individual. And if you’ve recently changed your business structure, such as changing from a sole trader to a Limited Company, you may need to wait for at least 12 months before you’re eligible for a mortgage.

It’s important to get specialist advice before investing in buy-to-let properties, as in addition to the financial implications, you’ll also have responsibilities as a landlord regarding health and safety, checking tenants and securing their deposit, and covering costs if the property is empty for any period of time.

In our research, 10% of self-employed individuals weren’t planning to buy a property in the next five years, with the main reasons being that the deposits required were too high (55%), or it’s too difficult to get a mortgage as a self-employed person (39%). And over three quarters (77%) of all those surveyed were concerned sourcing a mortgage would be difficult because they were self-employed.

That’s not surprising when you are required to provide more paperwork, and there are also many examples of mortgage providers penalising or declining self-employed applicants, along with not understanding the different financial status of contractors, freelancers and company directors.

But it’s important to remember that you’re still able to not only buy a property, but also secure a favourable mortgage when you’re self-employed. It just takes a bit more time and effort. 

• A bigger deposit will help you access more, and better, deals.
• Have all of your accounts and paperwork in order.
• Check, and improve, your credit rating.
• Have business and personal budget plans in place (which is good general advice if you’re self-employed).
• Try to secure longer-term and future contracts, with documented proof of agreements.
• Use a specialist broker as they can help you get the best deal

Many freelancers find that going through a broker makes the process easier and helps them to find a better rate, with 56% of those who secured a mortgage actually finding the process somewhat, or very easy.

It can be tricky to keep track of everything involved in the mortgage process, especially when you’re self-employed. To help you organise everything without becoming overwhelmed, we’ve compiled a quick checklist of everything you need to consider.

Preparation:

• Check your credit score (avoid hard credit checks)
• Set a realistic deposit amount (both for your income and the price of properties you’re considering)
• Reduce current debts and financial obligations
• Plan personal and business budgets
• If you’re planning for the future, consider targeting work with higher daily rates or longer-term contracts
• Check personal records and information to avoid any potential issues (electoral roll, passport, driving licence, address history etc)
• Budget for mortgage fees and other costs in buying a property
• Speak to specialist mortgage brokers or financial advisors on how you might be able to improve your preparations

Paperwork that could be required:

• Passport and/or driving licence.
• Your address history for the last 3 years.
• Council tax bill from the last 3 months.
• Utility bills dated within 3 months.
• Bank statements for the last 6 months.
• Proof of any other income (pensions, benefits, etc).
• Details of any existing financial commitments, including current mortgages, loans, or credit card debt.
• Proof of your deposit
• An up-to-date CV

Income proof:

• Two or more years’ certified accounts are preferable, but in some cases just one year can be accepted.
• 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).

The challenges of securing a self-employed mortgage may be discouraging, but with preparation, perseverance and specialist help, owning your own home or investing in a property portfolio are both attainable goals for any contractor, freelancer or company director. 

If you’d like to speak with an expert about anything covered in this guide, or anything else related to mortgages for the self-employed, our award-winning Partner would love to hear from you. Get in touch with CMME, here.

As the UK’s not-for-profit membership organisation for the self-employed, IPSE has provided recommendations to the Government and mortgage industry to provide better support for those looking to buy their own home. And by joining us and lending your voice to our campaigns, we can push for changes in the future, along with campaigns to end late payments, stop IR35 and improve the general financial wellbeing of the self-employed

Your property may be repossessed if you do not keep up repayments on your mortgage.

IPSE and CMME are not tax advisers and you should seek independent advice before making a decision regarding the most appropriate set up for your individual circumstances