CIS Mortgage

Self-Employed Mortgage

We specialise in Mortgage Advice for Subcontractors paid via the Construction Industry Scheme (CIS)

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Self-Employed Mortgage, Expert Mortgage Advice for CIS Subcontractors

Self-Employed Mortgage (Part 1)

David Sharpstone joins us to talk all about self-employed mortgages, in part one of our podcast. 

Podcast approved by The Openwork Partnership on 17/05/2024.

Is it hard to get a mortgage if you are self-employed?

This is a common myth. A lot of self-employed people that come to us for the first time assume it’s going to be hard. But it’s not hard for me, because I’ve been working with self-employed people to buy the homes of their dreams for the last 20 years. This is my bread and butter. 

Maybe if you go to the wrong mortgage broker or somebody that doesn’t specialise in the self-employed, you might find it difficult. Because there are so many different types of self-employed out there, the wrong broker could mean the wrong mortgage lender. 

So going through a mortgage broker that understands the self-employed and all the nuances that come with it will make it a lot easier, and improve your chances of getting a mortgage.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?

In theory, whether you’re employed or self-employed, you shouldn’t be restricted in the types of mortgage products available to you. The difference is in how the mortgage lender is going to assess your income. 

In terms of getting a 95% mortgage if you’re self-employed, again, the same range of mortgage products are available. 

Some mortgage lenders may restrict specialist products. For example, Nationwide has a product for First Time Buyers that allows you to borrow 5.5 times your income – but as it stands right now in April 2024, that is not available to self-employed people. 

But those situations are few and far between. I’d say for 99% of the mortgage market, the same products are available. So you should be able to get a 95% mortgage, no problem.

How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?

The vast majority of banks that people recognise – that is, your high street lenders and big building societies – will require two years of being self-employed. 

For a self-employed sole trader, that might be two years of tax calculations. If you’ve got a limited company, it might be two years of company accounts.

That said, you can get a mortgage with only one year’s self-employment. Certain lenders will take a view and work out mortgage affordability from that first year. They may need an accountant’s certificate to support that to show that the business is moving in the right direction. 

You will certainly need recent bank statements. These are going to be heavily scrutinised to check the business is looking healthy and the income coming into the business is consistent with the income we’re suggesting. But it’s absolutely doable.

My most recent year’s earnings were less than my average – will this affect my mortgage application?

The vast majority of mortgage lenders, especially the ones taking a two year track record, will take an average of two years if they are the same or increasing year on year. 

But if the latest year is lower than the previous year, there’s a downward trend. In this case the mortgage lender will take a cautious approach and use the latest year’s figures or the lower of the two years. It will definitely affect your mortgage application with most lenders.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage as someone who is self-employed?

Most mortgage lenders will lend between 4.5 and five times your income. That’s what we call a Loan to Income Cap. But the loan amount will also be affected by how many financial dependents you have, any car finance in your personal name, having children in nursery, paying maintenance, or having loans and credit cards. 

Generally speaking, to reach the higher level of around five times your borrowing, you’ve got to have quite a high household income of £75,000 to £100,000. With one or two lenders, if you’re in certain professions they might allow you to borrow up to 5.5 times your income. Typically these are professions with a clear salary scale like a doctor, lawyer, vet etc.

What mortgage deposit do I need if I’m self-employed? Can I use my self employment grant as a deposit?

The minimum deposit is 5% – that’s nice and straightforward. Obviously, the more deposit you’ve got, the better because that improves your chances. 

Lenders will often expect a higher credit score with a 5% deposit, while they might be more flexible if you’ve got a 50% deposit. 

I haven’t seen any self-employed grants since the pandemic, so I don’t think people are getting those. But I wouldn’t mind one! 

What are self-certification mortgages and do they still exist?

Wow – the 1990s want their questions back! But, believe it or not, there are still people that ask me if they can get a self-certification mortgage. I’m going to tell you right now – no, you can’t.

Back in the 1990s and the early part of the 2000s, mortgage lenders used to ask self-employed people how much they thought they might earn. This is before we had the big financial crisis in 2008. All people needed to do was write down a figure for their earnings and then sign it. They didn’t have to actually show any evidence of ever achieving that level of income. 

That was a big contributing factor to the housing market bubble bursting and the financial crisis. As a result, I haven’t seen self certification mortgages as long as I’ve been a mortgage broker, and I joined the industry in 2008.

How will I be assessed as a self-employed mortgage applicant?

It really depends – what flavour of self-employed are you? 

If you are a company director that owns a shareholding in the business of between 20% to 25% – and most directors have more than that – mortgage lenders can look at this two ways. They will either take income that you’ve drawn out personally by looking at tax calculations for the last two years, although the latest year can be used for some lenders. 

But, if you only draw out enough from your business to pay the bills, and you leave a lot of profit in the business, we can go to mortgage lenders that recognise that. They calculate mortgage affordability using retained profit in the business, plus the salary that you draw. Quite often for a company director that’s a minimum salary, to be tax efficient. 

Then you’ve got contractors. They might be an engineer or a day rate contractor like an IT professional. Mortgage lenders look at the value of those contracts. If you’re earning £200 a day, five days a week that’s £1,000. They’ll assume that you work 46 weeks of the year – because you’re going to have some holiday. So they would take your income as £46,000, which is then subject to the mortgage affordability calculator for that particular lender. 

You might be a subcontractor. A CIS subcontractor is still self-employed, but they have tax deducted at source. If you go to the right CIS mortgage lender – which is a real passion of mine –  lenders will look at the last three, six, 12 or even 24 months of payslips, before tax,  to work out how much you can borrow. 

So there are many different types of self-employment and different ways to work it out. 

Will IR35 affect my mortgage application?

IR35 is an HMRC tax rule set up to focus on people who are self-employed but working for one company. Perhaps they give you a laptop and set your hours, but you’re not paying tax or National Insurance. You’re still doing self-assessment. 

To HMRC it looks employed and it smells employed – but you’re still self-employed. The government is saying that you should really be seen as employed, which is why they created IR35. 

Often self-employed people with their own limited company work on government contracts like the HS2 project. They’re working for a construction firm and because of the IR35 rules, the firm they work for might put them on an umbrella company payroll scheme. 

They’re not permanently employed by this company, but it makes sure they’re paying tax and National Insurance as if they were employed. If that’s the case, some mortgage lenders will look at your umbrella company pay slips. 

Another lender might understand you’re only being paid through PAYE because of IR35, and they will ignore your payslips and just work off your day rate. 

How do I prove my income? What documents do I need?

First, you’re going to need to prove you are who you say you are. You will need ID like a driving licence or a passport.

Then we need to prove where you live, with some address identification – which can’t be a mobile phone bill. Then you’ve got to prove your deposit – if it’s coming from savings we will need four months’ bank statements showing the build up of funds.If it’s coming as a gift, we need a letter from the gifter, withevidence of who they are and where the money came from. 

Then we need to prove your income. If you’re a sole trader you’re going to need the last two years of tax calculations, formerly known as SA302s – they’re just called tax calculations or an annual tax summary. You also need a corresponding tax year overview, confirming the amount of tax and national insurance that has been paid or is outstanding. All these are available from HMRC online or via your accountants. 

If you’re a limited company director, you might be asked for those tax documents to show what you’ve drawn out of the business. On top of that, you might also be asked for your last one or two years’ company accounts. 

They don’t need to be audited accounts, unless you’re turning over a large sum of money of around £350,000 to £400,000. But they do need to be full accounts,  signed by you and your accountant. 

It’s really important that they are chartered accountants. A lot of clients have a bookkeeper that submits their limited company accounts but they don’t have a qualification that’s acceptable to a mortgage lender. So check that with a mortgage broker. 

If you’re a contractor, definitely have a copy of your contract ready. It would also help to have a CV to hand for your mortgage broker or lender. When I say a CV, they’re not interested in your hobbies at the weekend. It’s your work history. The aim is to show a consistency of income, having worked in that same field and earning the same sort of money for a few years.

A client coming to me with all of that documentation would be a dream case. I wouldn’t need to ask for anything. So if any potential clients are listening to this,  that list is exactly what I need to get you a successful mortgage application. 

It’s down to the skill of the mortgage broker to justify to a lender why they should potentially part with, say, half a million pounds. We’ve got to give them all the reason in the world to do that. So get your ducks in a row if you’re self-employed.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR 

MORTGAGE.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Approved by The Openwork Partnership on 17/05/2024.   

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If you’re reading this as a Construction Industry Scheme (CIS) contractor, then you or your partner are probably struggling to find a mortgage right now. We can help.
Self-Employed Mortgage, Expert Mortgage Advice for CIS Subcontractors

Self-Employed Mortgage (Part 2)

David Sharpstone continues the conversation around self employed mortgages, in part two of our series.

Do self-employed people have to pay higher mortgage rates?

Generally speaking, self-employed people will pay exactly the same rate as somebody who is employed. Things that will affect interest rates will be the amount of deposit and your credit history, which will inform whether we’re dealing with a high street lender or a specialist lender. 

There are also specific self-employed issues to consider – it might be relying on just one year’s accounts or just the latest year of accounts. If there happens to be adverse credit as well, we generally approach the same sort of lenders, who would cater for both. 

That said, if you’ve got good credit history, you’ll pay exactly the same interest rates as an employed person.

Can I get a joint mortgage with a self-employed worker?

Yes, no problem. It doesn’t matter whether you are two self-employed workers or one of you is self-employed and one is employed. Some mortgage lenders even allow three or four incomes and applicants to be on the mortgage. So we can have any combination of employment or self-employment – it’s not an issue at all.

I’ve recently gone from being employed to self-employed. How soon can I get a mortgage?

The earliest you could get a mortgage would be after having been self-employed for one year. As a sole trader, that means you’ve submitted your first self-assessment, so you could provide evidence of your income and profits from self-employment on a tax document. Typically we need the SA302 or tax calculation. 

If you’re a company director, you would need to have done one year of company returns.

You’d be able to show how much profit the business has made during your first year. 

There is an exception to that, if you’re self-employed as a tradesperson and you’re paid through the CIS scheme. In that situation, once you’ve got three months’ CIS payslips, some lenders will consider you.

Can I get a guarantor mortgage if I’m self-employed?

The first thing here is to establish what we mean by guarantor. If we’re talking about the traditional sense, where a parent or family member puts up their own property as collateral to help someone get a mortgage, that doesn’t really exist any more. 

What a lot of people mean by guarantor these days is adding an additional person to the mortgage – often a relative, like a sibling or a parent – and using their income to boost the borrowing. 

Lenders do have mortgage products available for that, and sometimes it’s just written into their policy. The additional person won’t necessarily need to live in the property or even be registered on the deeds, which is helpful as it can have implications for the amount of stamp duty to pay. 

A guarantor mortgage is more commonly now known as a Joint Borrower Sole Proprietor arrangement on a mortgage. Being self-employed is not a barrier to getting this, so yes, you can get a family member to give your mortgage a boost.

Can I use shared ownership if I’m self-employed?

Shared ownership is a really good scheme from the government where people can buy a share of a property. It comes under the remit of affordable housing. 

Being self-employed is not a barrier to getting a shared ownership property. Whether you’re self-employed or employed, it’s very important to satisfy the housing association that makes the initial assessment, by evidencing your income. 

Having an accountant that can provide additional information for your shared ownership application could also help.

Can I get a Buy to Let mortgage if I’m self-employed?

The first thing that will apply, whether you’re employed or self-employed, is that for a Buy to Let mortgage you would usually need to already be an owner occupier. So you’d need to own a residential property. 

There are exceptions to that, though, and generally being self-employed is not a barrier to Buy to Let. The mortgage lender will want to know what your personal income is, mainly to establish whether you’ll fall into a higher or lower tax rate category. With Buy to Let mortgages, the amount you can borrow is going to be directly linked to your tax status – so being self-employed, again, be prepared to demonstrate your income for that.

How does remortgaging work if I’m self-employed?

With remortgaging there are always two options: staying with your existing mortgage lender with a product switch, or changing lender. 

Your current mortgage lender will always offer you a follow-on deal, or you can look at the rest of the market to find a better option elsewhere. If you’re sticking with your existing lender, there’s no underwriting for that, which means there’s no requirement for the lender to view any documentation to establish your income. 

A mortgage broker might need to check your bank statements to see if you’re still earning an income, or depending on their regulations, they may ask to look at some more up-to-date self-employed documentation. 

If you’re self-employed and you’re looking to move to a different lender for a better deal, the application process will be exactly the same as when applying for a mortgage the first time round. You’ve got to be prepared to have all of your documents ready to evidence your income.

Will being self-employed with bad credit affect my mortgage deposit?

Generally speaking, yes. Bad credit is a very subjective phrase – it could range from a missed or late payment on a mobile phone contract, through to throwing in the towel and asking a mortgage lender to take away your home because you can’t manage your finances. 

If we were to assume bad credit means some historic CCJs or defaults, that were registered more than 12 months ago and have been satisfied, some mortgage lenders might tolerate that with a 5% or 10% deposit. 

In general, though, you’ll have a far easier time getting a mortgage with a 15% deposit or more if your credit is not perfect – that’s what I advise my clients.

How can I get a mortgage as the director of a limited company?

That’s something that we specialise in here. To get a mortgage as a director of a limited company, you’ve got two ways to demonstrate your income – and one way not to!

For a lot of company directors, especially if they’re the owner of the business, there is a myth that they can inflate their own salary on a few pay slips as an employee of the limited company. But lenders aren’t daft and would spot that immediately. 

The reality is that, with most mortgage lenders, when you have a shareholding of more than 20% or 25% of the business they treat you as self-employed. So they’re not interested in your pay slips. 

Now we come down to the two different ways to demonstrate your income as a director of a limited company. The first, traditional way is to simply take what you have drawn out from the company and paid tax on. Not just basic salary – because there’s no tax to pay on a minimum salary. So the lender would look at your tax calculation for the last two years, your salary and any dividends from your company. 

A less traditional, upcoming way of assessing income is looking at the performance of the business. A lot of people have a company that does well and makes a good amount of profit, where the director doesn’t need to draw profit out of the business.

The minute you take the money out of the company, you’re paying tax on it. So if you don’t need the money to live off or to cover day-to-day expenditures, you can leave it in the business as retained profit. More and more lenders are moving to look at that profit, plus any director salary that’s drawn out. 

They call it retained profit plus director salary – and it’s very useful for people that leave a lot of money in the business. 

How can I improve my chances of getting a mortgage as a self-employed individual? How can a mortgage broker help?

I’ve seen so many self-employed people struggle to get a mortgage when they’re trying to do it themselves.

There are so many different quirks around how lenders look at you and your income. The difficulty when you’re self-employed is showing the right documents. Are those documents in date? You get a period of time before you have to submit them, or update HMRC or Companies House. Quite often documents can be 18 months old or more. That’s not breaking any tax rules, but trying to find the right mortgage lender that accepts older documents can be difficult. 

The knowledge of a broker is vital there. Once we’ve had a look at a situation, we’ll also know who to engage with around your mortgage application – more often than not, that’s going to be your accountant. 

To improve your chances of getting a mortgage, especially if you’re a company director, check that your accountant has the qualifications that a mortgage lender is looking for. The reality is that a lot of accountants aren’t chartered. There’s nothing wrong with that, but a lender just won’t accept their word. There are certain qualifications with professional bodies that we need the accountant to have. 

Another key thing to improve your chances is to ask a broker to look over your recent bank statements. We’re currently in May 2024, and so for a sole trader the most recent set of tax calculations would be for April 2022 to April 2023. Some people may have done them for April 2024 – but the deadline isn’t until January next year. People tend to leave it until January to start thinking about it. 

Again, it’s not a problem. We can still use your 2022 to 2023 details plus your bank statements, and a broker knows what a lender is looking for. Once an application is submitted, the lender will look through the business bank account to see whether the current income into the business is consistent with the turnover on the tax calculations. 

If someone has £50,000 of profit in their business, but the bank statements don’t show any income for the last three months, that’s going to get picked up by a lender. They want to know that the mortgage is going to be affordable. That’s how a broker can help and advise you to improve your chances. We help you get your ducks in a row. 

Don’t look for a property and get an offer agreed first. Because whilst you’re waiting weeks for your accountant to come off the golf course and bring your accounts up to date, you’ll have lost that property. So get it all prepared first.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

CIS Mortgage Advice is a trading style of Just Mortgages Direct Limited which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 6/6/2024

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