More people are going self-employed (Image: Sopaphan Romphongoen via Getty Images)
Since the introduction of higher National Insurance contributions for employers in April last year, more and more companies have placed their hiring on hold. As a result, the challenging jobs market has meant a growing number of people, out of necessity, have set up their own businesses.
On the back of this, one broker said he was seeing a rise in the number of newly self-employed people asking whether they can get a mortgage, fully expecting to be told they can’t because they still don’t have three full years of accounts.
Jamie Elvin, director of UK-wide broker Strive Mortgages, which specialises in mortgages for company directors and sole traders, said: “One of the biggest mortgage myths among people who have recently set up a business is that they will have no chance of getting a mortgage until they have been running for three years with three full sets of accounts. However, this simply isn’t true and I’ve lost count of the number of times I’ve had to say it to self-employed clients looking for a mortgage.”
Jamie said many specialist lenders and selected high street lenders had moved with the times and will now accept just one full year of accounts — and he added that almost all high street lenders would now accept two years of accounts.
He said: “Banks are now much more agile and comfortable when it comes to self-employed applicants. In part, this is because the number of self-employed and people with multiple income streams is growing all the time so they have had to adapt.”
Jamie Elvin (Image: Newspage)
Jamie added that different lenders would look at the accounts you have in different ways, which can make a huge difference in terms of how much you can borrow.
He said: “Let’s say you have been running a company for two years and have two full sets of accounts. In the latest financial year, you earned £100,000 and the average over the two full years is £75,000. Some lenders will be prepared to lend to you based purely on the latest set of accounts, so assuming a standard lending multiple of 5x, that would be a loan of £500,000.
“But if you went with a lender that averaged out the income over the two years, the most you would be able to borrow would be £375,000. So knowing which lenders work on which basis is key.”
While income multiples for self-employed are much the same as for the employed, namely around 4.5-5x income, in some cases certain lenders will stretch to 5.5x and even 6.5x income.
Jamie said: “Again, knowing which lenders are more flexible when it comes to self-employed applicants is really important, as the lending criteria can vary significantly.”
Another hack, Jamie said, was to know which lenders would only look at your salary and dividends and stop there — and which would take a far more generous view and assess your salary alongside your company’s total net profit from which your dividends are drawn.
Jamie said: “This is another vital element of the self-employed mortgage application. Let’s imagine you take £10,000 per annum as salary and £40,000 in dividends. That’s £50,000 in total that would result in a mortgage of £250,000 at a 5x income multiple.
“But let’s say your company’s net profit is £100,000, Some lenders will take that whole £100,000 on top of the £10,000 salary, which would enable you to borrow £550,000 at five times income. Same director but totally different borrowing power. Knowing how different lenders are prepared to look at your company’s finances is absolutely key when you’re self-employed and applying for a mortgage.”
