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Anyone who has tried to get a mortgage while being self-employed probably won’t look back fondly on the memory.
Way more paperwork, from tax returns to bank statements dating back several years, can be required.
And then there’s the fact most accountants will have tried down the years to lower your tax liability, claiming expenses that lower your profit and adding lump sums to pension pots.
But that profit is exactly the thing mortgage providers will be looking at in determining how much they’ll lend you.
“Many self-employed borrowers want to beat the tax man and the mortgage man at the same time but this is impossible,” says broker Mike Staton.
Here’s some advice from mortgage experts…
Cut out the creative accounting before applying
“Accountants often use creative accounting to reduce tax liabilities, but this can lower your reported income, impacting mortgage affordability. Lower taxes mean lower income,” says mortgage broker Harps Garcha.
How far back will you need documentation?
Non-PAYE applicants should plan ahead, as lenders often review income from the past one or two years, unlike PAYE, which focuses on the last three to six months.
David Stirling, a financial adviser at Mint Mortgages and Protection, says: “For a self-employed borrower we would advise trying to get a couple of strong years’ accounts, preferably with little variation.
“A large increase or decrease in the most recent year will lead to extra questions from the lender to assess plausibility of the application, with an often unpredictable affordability calculation.”
Be aware of what’s being looked at
If your income is going down, lenders will focus on your most recent statements, says Adam Stiles, managing director at Helix Financial Partners.
“By income, we mean profit from self-employment if a sole trader, profit/drawings from partnership if in an LLP, or salary and dividends or salary and net profit if from a limited company and your shareholdings are 15%-25%+ (depends on the lender),” says Stiles.
Different lenders, different rules
HSBC, for instance, will use a director’s share of profits, while other mainstream lenders will often use an average of two to three years’ figures.
“These can result in massively different affordability calculations for borrowers,” says Stirling.
You may have more luck with smaller lenders
“There is a whole market of smaller lenders who, like non-PAYE workers, are not afraid to innovate and who understand the complexities and challenges of not having a standard payslip every month,” Peter Dockar, chief commercial officer at Gen H, says.
He recommends keeping things that are in your control, like credit history, as clean as possible.
You’re going to have to put in the time
There will be a mountain of paperwork.
“Any issues with any of this usually gets a decline from lenders,” says Rohit Kohli, director at The Mortgage Shop.
“Speak to a broker with plenty of time ahead when applying for a mortgage and get organised.”
A positive development
Jack Tutton, director at SJ Mortgages, says there has been some improvement in recent years in the prospects for self-employed people.
Some lenders now ask accountants for a reference to verify someone’s accounts.
“From my experience this has made the process in some scenarios much simpler with a higher success rate,” says Tutton.
Beware brokers who say they’re experts in self-employed mortgages
Broker Mike Staton says: “Many brokers try to make out that self-employed is a difficult mortgage, they then claim to be specialists, then charge a premium to do an application for the clients.”
The interviews above were carried out by industry news agency Newspage and provided to the Money blog