Buying a home when you’re self-employed

When you’re shopping for mortgages, being self-employed can put you at a disadvantage. So, what are the ways for self-employed people to become homeowners?

The quick answer

If you’re self-employed, various types of mortgages are available:

• Fixed rate repayment mortgages
• Variable rate repayment mortgages
• Tracker mortgages
• Interest-only mortgages

But, because your income affects how much you can borrow (and self-employed income can vary year-to-year), lenders generally need to see evidence of at least 1 year’s worth of earnings, if not more in some cases.

It makes sense to have all your finances ship-shape before applying and you might need to plan further ahead due to the higher scrutiny on your earnings.

You might find Shared Ownership is a potential option for you if your self-employed earnings don’t give you the house buying budget you need. Or, you might find an alternative way onto the property ladder like Wayhome—where there is no mortgage and you can get a bigger home buying budget—suits you best.

Below we take you through all your options in more detail.

The detailed answer

Being freelance brings many freedoms, but when it comes to something as important as owning a home, it gets more complicated.  Around 15% of the UK workforce is now self-employed—almost twice the level of 40 years ago. Since 2010, only 10% of home loans have been made available to those that work for themselves.

How  is self-employed defined?

If you’re a sole trader, or hold a stake of 25% or more in a company, you will be treated as self-employed. You could also be considered self-employed if you are:

• A sub-contractor with income from more than one contract
• A partner in a business
• A franchise owner
• Employed by a limited company, or limited liability partnership, whose reward package includes dividends and/or  a share of the profits

Your income affects the amount you can borrow

When it comes to applying for a mortgage, lenders will base your ability to borrow on your income. So, the higher your declared earnings are, the more they are likely to lend.  You should bear that in mind.

Shopping around could pay off

When you’re busy, finding time to do this can be difficult. But, there are things you can consider to save time.

You may want to go direct to a bank or building society, particularly if they already hold other accounts for you or your business. Firstly, check their self-employed policy and details of any fees that might apply. For example, depending on the type of mortgage that’s available to you, you may need a bigger deposit. Or, you may be offered a less competitive rate than if you were employed.

You could also use a mortgage broker to search for you.  They will have information about which lenders are more likely to lend to self-employed people and be able to give you advice on your options.

What are some mortgage types available to self-employed people?

There are a number of mortgage products that can work for the self-employed and contractors.

Fixed rate repayment mortgages

With a fixed rate mortgage, your repayments stay stable for as long as the interest rate is fixed for an agreed period.  This is usually between 1 and 5 years. This option can help you better plan ahead when it comes to what you need to earn from future contracts and assignments for instance.

While your rate is fixed, you’ll be protected from interest rate rises. But, you won’t benefit from any reductions. So, it can pay to make sure you’ve got the best rate you can find at the outset. Whilst interest rates remain low, this may be a good option for many people.  And, because this is a repayment mortgage, every payment you make pays back part of the amount you borrowed plus the interest. This means that by the time you have paid off the full amount, you completely own your home.

Variable rate repayment mortgages 

With a variable rate mortgage, the interest rate on the mortgage changes when the lender/bank changes their rate. You are not protected from interest rate increases, which could potentially affect your repayments, but you could benefit if interest rates go down. Similar to fixed rate repayment mortgages, every payment you make pays back part of the amount you’ve borrowed plus the interest.

Tracker mortgages 

You may be able to take advantage of movements in the Bank of England’s base rate with a tracker mortgage. These mortgages track any movements in the Bank of England base rate—the anchor point for most mortgage products. They typically last for between 2 and 5 years and tie your mortgage interest rates to the base rate plus a fixed amount.

For example, the current Bank of England base rate of 0.5% (as of December 2019) plus a fixed 1.5%, for a total interest rate of 2%.

If the base rate goes down, so do your repayments. But if the rate goes up, then you may have higher repayments every month.

Interest-only mortgages 

You might consider an interest-only mortgage if you know you’ll be able to repay the lump sum of the loan at the end of the mortgage term and you can plan for that in the future. Your monthly repayments will be made up of just the interest on your loan (or moving loan), so the total payment will be lower than with a repayment mortgage, but won’t increase your equity in your home.

Taking out, or switching to, an interest-only mortgage can be a short-term option for freelancers, contractors or small business owners with reduced earnings. This is because they can often be switched to other self-employed mortgage types midway through the term.

Something to always keep in mind is that if house prices go down you might find yourself in something called ‘negative equity’. This means your home might be worth less than the mortgage secured on it.

For example, if you bought a property for £170,000, with a mortgage of £150,000 and the property falls in value to £140,000, you would be in negative equity.

What other ways can you become a homeowner?

If getting a mortgage for the right home or saving a large deposit is proving too difficult, there are other routes you can look at.

Shared Ownership

Shared Ownership is a part-mortgage, part-rent scheme where you typically buy between 25%-75% of the property with the help of a lender. Over time, you can buy more of the home through what’s known as ‘staircasing’.

You’ll typically need a minimum of 5% deposit, which combined with a mortgage, allows you to buy between 25% – 75% of the property. The remaining share in the home is typically owned by a housing association or private property developer, who you’ll pay rent to.

However, a big difference is that Shared Ownership schemes are often restricted to ‘new build’ homes and developments. Not everyone is eligible for these types of homes and it can be expensive to staircase. Because of the staircasing fees it may only make sense to do it in large chunks. Lastly, in some cases it may be harder to sell on if you want to leave because there are rules that only permit selling to someone else who qualifies for shared ownership.

Wayhome

Wayhome offers a no-mortgage, no-debt, gradual homeownership product. With just 5% deposit on homes between £250,000 and £500,000, we partner you with financial institutions—like pension funds—to buy a home together, in cash.

If you buy 5% of the home with your deposit, you’ll pay rent on the remaining 95% to the funding partner.  Similarly, you can staircase at any time from as little as £1 to a maximum 5% of the home’s value each year to increase your ownership percentage.

Unlike Shared Ownership, we don’t charge you anything to buy more of your home and—as long as the home is worth the same, or more, than when it was first bought—you can buy out the funding partner.

Find out more about how gradual homeownership works with Wayhome

With any of these options what information might you need to provide?

Like any employed applicant, you’ll need to show recent bank statements and regular outgoings such as childcare costs, holiday spending and pension contributions. If you have any personal loans and credit cards you’ll probably need to include details of repayments.

When it comes to proof of earnings, the standard requirement is a verified record of the past 3 years.

You may also be asked for accounts showing:

• the net profit for sole traders
• share of net profit for partnerships
• and/or salary and dividends for directors of limited companies

Some lenders can be put off by a downward trend in your accounts or base their assessment on your worst year. You may have good and bad months or years, or you may be keeping equity in the business. Luckily, there are flexible lenders who take an average of the past 3 years’ profits.

If you are a contractor and have formal contracts in place, with paperwork to show fixed earnings, you may not need several years of accounts.  Lenders will normally run a full credit check on you and your score will form part of the assessment. Any previous credit issues, for example a County Court Judgment, may well affect your ability to borrow.

What self-employed people can do to try to improve their chances of owning a home

There are many factors that can influence your ability to buy your own home. If you’re self-employed, you may want to consider some of the following to improve your chances of owning your own home:

• Speak to a mortgage broker—Not all lenders have the same criteria. A mortgage broker may be able to advise you on the most suitable lender.
• Consider other alternatives—If there’s a particular area you love, you’re happy with a new build or need a property of a certain size, and the mortgage you can get restricts you, then there are other products you can consider.
• Check you’re on the electoral roll—Check with your local council. This may help with your credit score.
• Check your credit file —Make sure there aren’t any unfavourable entries against you, especially ones you’re not aware of.
• Be careful about the type, and amount, of credit you take out—For instance, lenders may interpret payday loans as financial difficulty.
• Minimise credit checks for other insurance or credit applications —Multiple credit checks in a short space of time may reduce your overall credit score. Be aware if using comparison sites for insurance as they may run multiple checks.
• Allowing your credit card to reach its limit may be an issue—The closer you are to your credit card limit, the lower your credit score could be.
• Paying more than the minimum amount may help —Just making the minimum payments may suggest to the lender that you could be in financial difficulty.
• Thinking about how much deposit you need to have—Preparation is key, especially if family members are giving you money towards your deposit.
• If using business funds, speak to your accountant —Taking regular withdrawals, rather than taking a large lump sum, might lead to a smoother underwriting. When taking a large lump sum the lender may ask your accountant to confirm this won’t be detrimental to your business, causing an extra delay in the process.
• Get yourself an agreement-in-principle—Most estate agents may not let you view the property, let alone make an offer, without an agreement-in-principle. An agreement-in-principle indicates that you’re viewing properties you can afford to make an offer on. It’s also a good indication that your credit report is satisfactory.
• Limited company accounts—If you’re a limited company director then the last 2 years’ worth of fully signed accounts is required in most cases. Though, some lenders may accept just 1 year’s accounts. The latest accounts can’t usually be over 18 months old, so you may want to finalise the latest year’s accounts as soon as possible.
• Personal Tax Returns —Self-employed workers need to request three years SA302s and a tax overview from HMRC.  Some may accept as little as 1 year’s SA302, but 3 years’ worth may give you access to a fuller range of lenders and deals.
• Contractors —You’ll likely need the last 12 months of contracts, fully signed by all parties. These need to clearly show your day-rate having been paid in sterling, with an expiry date ideally included on each contract. Obviously, not all contracts have an end date, some run day-to-day, so rolling contracts may be accepted.
• CIS or Umbrella —You’ll typically need six months’ worth of payslips.

Wrapping up

As a self-employed person, you’re under more scrutiny because your earnings can be seen as less consistent. But, with careful planning and with your finances in order, you may still have access to mortgage products. The question then becomes, is your mortgage quote high enough to let you buy the type of home you need? Or do you need to consider alternative ways to homeownership?