How sole traders can improve their chances of securing a mortgageOpinion
Posted by: electime 13th July 2021
By Joanne Harris, Technical Commercial Manager at SJD Accountancy – an accountancy firm that works with sole traders, freelancers and contractors
The COVID-19 pandemic has had significant financial ramifications across the board, but electricians and millions of other self-employed workers across the UK have been hit particularly hard.
Prospective self-employed home buyers are struggling to secure mortgages due to the financial difficulties of the past 18 months. A recent report undertaken by IPSE found that more than two-thirds of self-employed people have said that some lenders would not consider them because of their self-employed status.
This statistic is reflected in the current marketplace, with many of the UK’s leading banks rejecting self-employed applications outright if they have been benefitting from the government’s Self Employment Income Support Scheme (SEISS), claiming that it doesn’t sufficiently corroborate their financial status.
But it’s not just the introduction of SEISS that has resulted in significant challenges for self-employed people looking to get on the property ladder.
Following the banning of self-certification mortgages in 2014, self-employed people have had to apply for a mortgage in the same way as everyone else, arguably with more hoops to jump through.
Understanding application criteria
Financial uncertainty is having a significant impact on the self-employed community, with 75 per cent of people saying they were worried they wouldn’t have the job security to get a mortgage.
For sole traders looking to secure a mortgage, lenders will require insight into their current financial status to effectively determine whether they can feasibly afford to repay their loan.
There are stricter lending requirements for self-employed individuals, so proof of a steady, reliable income is paramount. It’s also advisable that self-employed individuals undertake a little more planning when it comes to their finances.
Typically, lenders will require supporting documentation of your financial position, including:
- Two or more years’ certified accounts to work out average annual earnings (at present, this includes 2019/20 and 2020/21 tax years)
- SA302 forms or a tax overview from HMRC from the past two to three years
- Evidence of any upcoming contracts (if you’re a contractor)
- Evidence of any dividend payments (if you’re a director)
It’s also worth noting that accounts that have been prepared and signed-off by a qualified accountant will likely be looked upon more favourably, as this infers a degree of increased reliability.
Where possible, electricians and other self-employed individuals should look to engage a qualified accountant who can work out their average profit and income from the past few years to help strengthen their mortgage application.
Optimising your application
It is essential for self-employed individuals to adequately demonstrate their ability to repay their mortgage at regular intervals. This is where beneficiaries of the SEISS grant are being penalised, as it makes it more difficult to prove a regular income stream.
Lenders are slowly starting to recognise and address this issue and the negative impact it is having on the self-employed. In response, some lenders are considering the potential of comparing current business bank statements or accounts to the same period from 2019/20 to provide a more accurate indication of trading levels in a so-called “normal” business environment.
The importance of considerations such as the size of your deposit and good credit history shouldn’t be underestimated either. Self-employed workers that can afford to put down a larger cash deposit may also be looked upon more favourably with some lenders saying they will consider just one year of accounts, provided the applicant is putting down a significant cash deposit (borrowing up to a maximum of 75 per cent loan-to-value (LTV)).
Supporting self-employed getting onto the property ladder
For those sole traders and other self-employed individuals who want to get onto the property ladder, there are some simple steps to take that will improve borrowing chances.
- Use an accountant
Putting forward accounts that have been signed off by a certified accountant will be more appealing to lenders, showing that you are financially stable and have a steady and reliable income.
- Organise your paperwork
It’s really important to collate your annual tax calculations for each year – the further back you can prove your income, the better. Currently, most lenders require between two and three years of accounts and the relevant SA302 forms, however the level of detail required from the self-employed does seem to be under review by various lenders.
Your accountant will be able to supply these forms, or if you file via self-assessment online, you can access these by logging into your account. For those who file their taxes by post, HMRC will be able to send these forms, upon request.
- Put forward a sizeable deposit if you can
A larger deposit will typically make your application more attractive to lenders, particularly during times of financial uncertainty.
Most lenders are looking for deposits of at least 10 per cent or more, so it may be advisable to aim for a deposit of around 15%. If you’re newly registered as being self-employed, many lenders may only consider your application if you have a 15 per cent deposit or more.
- Get your accounts in order
Before applying for a mortgage, it’s worth taking the time to get your financial affairs in order. This may include paying off outstanding debts, closing unused bank accounts and ensuring your credit report is a reflection of your current financial situation.
It’s also worth reviewing your spending habits, as lenders will also take this into account. Put off any large-scale purchases (where possible) to stand yourself in the best possible stead.
Having reliable proof of your financial status will encourage lenders to review your application more favourably and provide real insight into your wage in normal circumstances.
- Review the market
The property market has plenty of mortgage options available meaning it can be difficult to identify the right deal for you. Often, having expert support to help ensure you’re putting your best foot forward will make a big difference when looking to secure a mortgage.
Different lenders will often use different criteria to assess your income as a sole trader. Individual lenders will also have varying interest rates and pricing, which will also depend on your application. It’s important to review all of these before deciding on the right lender for you.
Using a broker is also an option, as they generally have whole market access and will do the leg work for you. They often offer rates and products that are not generally available on the consumer market. At SJD, we choose to partner with CMME – Mortgages for Independent Professionals who are experts in dealing with more complex cases such as sole traders and contractors and understand the common objections traditional lenders have with people who choose to work this way.
It will be interesting to see how the property market responds to the ever-evolving marketplace brought on by the COVID-19 pandemic, but hopefully, the dust will settle and allow the self-employed to get their feet on to the property ladder more easily.