Anyone who has tried to get a mortgage while self-employed is unlikely to have fond memories of it.
Much more paperwork, from tax returns to bank statements dating back several years, may be required.
And then there’s the fact that most accountants will have tried over the years to reduce your tax liability, by claiming back expenses that reduce your profits and adding lump sums to pension funds.
But that profit is exactly what mortgage lenders will take into account when determining how much they’ll lend you.
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“Many self-employed borrowers want to beat the taxman and the mortgage lender at the same time, but that’s impossible,” broker Mike Staton told the Money Blog.
Here are some tips from mortgage experts…
Eliminate Creative Accounting Before Applying
“Accountants often use creative accounting to reduce tax liabilities, but this can reduce your reported income, impacting mortgage affordability. Lower taxes mean lower income,” says mortgage broker Harps Garcha.
Until when will you need documentation?
Non-PAYE applicants should plan ahead, as lenders often look at income from the last one or two years, unlike PAYE, which focuses on the last three to six months.
David Stirling, financial adviser at Mint Mortgages and Protection, says: “For a self-employed borrower, we would advise trying to get strong accounts over a few years, preferably with little variation.
“A significant increase or decrease in the most recent year will result in additional questions from the lender to assess the plausibility of the application, with an affordability calculation often unpredictable.”
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Be aware of what is being looked at
If your income is decreasing, lenders will focus on your most recent statements, says Adam Stiles, managing director of Helix Financial Partners.
“By income we mean self-employment profit if you are a sole trader, partnership profits/withdrawals if you are in an LLP, or salary and dividends or salary and net profit if you come from a limited liability company and your holdings are 15% to 25%+. (it depends on the lender),” says Stiles.
Different lenders, different rules
HSBC, for example, will use a director’s share of profits, while other traditional lenders will often use figures averaging over two or three years.
“This can result in wildly different affordability calculations for borrowers,” says Stirling.
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You may have better 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,” explains Peter Dokar , commercial director of Gen H. .
He recommends keeping things that are within your control, like credit history, as clean as possible.
You’re going to have to spend some time on it
There will be a mountain of paperwork.
“Any issues with any of this usually result in rejection from lenders,” says Rohit Kohli, director of The Mortgage Shop.
“Talk to a broker plenty of time in advance when applying for a mortgage and get organized. »
Photo: iStock
A positive development
Jack Tutton, director of SJ Mortgages, says there has been some improvement in recent years in the outlook for the self-employed.
Some lenders now ask for a reference from accountants to verify someone’s accounts.
“In my experience, this has made the process in some scenarios much simpler, with a higher success rate,” says Tutton.
Be wary of brokers who claim to be experts in self-employed mortgages
Broker Mike Staton says: “Many brokers try to make self-employed seem like a difficult mortgage, they then claim to be specialists and then charge a premium to apply for clients. »
The above interviews were conducted by industry news agency Newspage and provided to the Money Blog.