Whether you dream of one day owning a large pile in the country, or have your eye on a pokey one-bedroom flat in the city centre, getting a foot on the property ladder is the aspiration of many. With rent prices on the increase (Brighton and Bristol saw an average rise of 18 per cent in 2015), the lure of getting a mortgage burns greater than ever before.
The government’s most recent review into the self-employed found that there needs to be a revolution in flexible financial solutions to suit the unique finances of micro-business owners; in particular mortgages.
While renting a property in the UK has now become somewhat of the norm for many, if you’re looking to make a purchase on your first property and you’re self-employed, how can you maximise your chances?
Generation rent, but not for long!
A study by the Association of Residential Lettings Agents finds that if you’re looking to purchase a property in 2016, you’ll have spent on average almost £53,000 on monthly payments since leaving the family home. Welcome to generation rent.
Get off to a good start when applying for a mortgage by ensuring that your cash flow and finances are in impeccable order. Most lenders ask for 5 per cent of the total house price upfront, so for example if you wanted to purchase a £200,000 property, you would need a deposit of £10,000. Therefore you would take on a mortgage of £190,000 plus interest.
Where should I start looking?
There are many high street lenders available when applying for a mortgage, including banks and building societies. However, be aware that many of these aren’t the best options for small business owners. Many high street lenders are built for PAYE finances and don’t necessarily understand the complex finances of a business director.
This lack of understanding is exactly the reason we recently launched Crunch Mortgages; we use specialist mortgage brokers to connect business owners with lenders who understand their finances. But of course there are plenty of brokers out there, and contacting a specialist is your best bet to find a lender who understands your finances.
How to get a mortgage if you’re self-employed
Alongside the usual mortgage application staples; proof of identity, address history, deposit and bank statements, business owners also need to collate certain paperwork to aid a mortgage application.
Sole trader
If you operate as a sole trader, the paperwork you’ll need to ensure you have ready includes a minimum of one year’s finalised accounts, or an SA302 from HMRC that is dated less than 18 months old.
Limited company contractors and freelancers
The paperwork required for contractors and freelancers is slightly more complex than that of a sole trader. You’ll need to prove a minimum of 12 months of contracting or freelancing experience, and have at least six months remaining on your current working contract, although many lenders will need more than this, in the form of past accounts.
Make it easy on yourself
According to the BBC, house prices rose by 4.5 per cent in 2015, with the average UK property now costing £196,999. A good starting point is to think carefully about the amount of debt you can actually afford to take on. While it might be tempting to get the biggest mortgage you can, will you be able to afford the monthly repayments, especially if your have unpredictable cash flow?
Ensure you have all your paperwork in order and a solid idea of your income. A good broker will help you here. Some key points to think about are:
- Do you receive any income through other means?
- Have you been using any legal loopholes to increase your profits?
- Remember you may have good and bad months of business, but your mortgage needs to be paid without fail
Bide your time. It’s unlikely that if you’ve got less than 12 months of accounts, and if you’re new to freelancing, that you’ll be accepted for a mortgage. Lenders look more favourably to the self-employed who have more than two years of accounts behind them. Halifax’s mortgage director, Craig McKinlay, stated for The Guardian:
‘As long as they [the lender] can see some evidence that you can afford the mortgage going forward, then that could be fine. They’re looking at things like the accounts being stable, no big losses, making sure your business is not about to fail’.
What kind of mortgages are there?
When looking to get a mortgage it’s important to have an understanding of the different repayment methods:
Fixed rate
A fixed rate mortgage has an interest rate that stays the same throughout the duration of your borrowing. They’re typically between one and five years in length, with the main benefit being that a fixed rate mortgage gives you more financial stability; if there is a rise in interest rates your repayments will remain the same.
Tracker
Usually in place for two to five years, a tracker mortgage is linked to the Bank of England base rate, and therefore rises and falls when the rate changes. Total rate is the base rate plus a fixed amount, for example the current base of 0.5 per cent plus a fixed 1.5 per cent, making a total rate of 2 per cent. Overall a tracker mortgage gives you lower rates than a fixed rate mortgage, however if interest rates rise, so will your repayments.
Interest only
With an interest only mortgage your repayments consist of interest payments only and no capital repayments. When the mortgage term ends, you will still owe the lender the full amount of the original mortgage.
What if I get turned down?
If you’re unfortunate enough to be turned down or refused a mortgage, find out specifically why and enquire how you can rectify the issue(s) at hand. Speak with an independent mortgage adviser about your situation and see if they can offer any guidance.
Darren Fell is founder and managing director of Crunch Accounting.
Further reading on mortgages
