A real hot topic right now is mortgages and there are many first time buyers out there asking the question “How much mortgage will I be lent as Self-Employed?” and so we wanted to write a blog just clarifying how the system works for self-employed people looking to get a mortgage. Spoiler alert…it’s not as easy as it once was!
How mortgages work for self-employed people
Unlike employed people who are on PAYE, the process for mortgage lenders evaluating your income as self-employed is much harder. The issue is, a mortgage lender is taking (what they deem to be) a bigger chance on you as a self-employed person because you don’t have a guaranteed fixed income. They see you as a risk because at anytime your workload could stop and suddenly you have no money to repay the large sum of money they once lent you. Whereas an employed person is deemed to be a ‘safer bet’ because they have a guaranteed regular income. So how do mortgage lenders go about valuing your income when self-employed?
The rule of thumb is this – a mortgage lender will lend you approximately 4 to 4.5 times your annual profit as dictated by the figures you input on your annual self-assessment tax return. The word to really bear in mind here is profit. A mortgage lender will NOT take into account your turnover – all the lender takes into account when valuing how much mortgage they will lend you is based on your profit, they see this as the defining sum as to how much money you personally actually make.
And it is here that many self-employed people get frustrated, because your profit is only what’s left after you minus all your outgoings and the allowable expenses you’ve claimed in your tax return – and if you’ve got a good accountant or know what you’re doing, you’ll have likely claimed a LOT of allowable expenses, and why shouldn’t you? Allowable expenses are there for a reason, to help businesses run! But the mortgage lender doesn’t see it like this, they only see the profit that you personally retain from the business as the amount of money you make each year.
So going back to the rule of thumb, for example, let’s say your business turned over £50,000 last year – well done! But once you deduct all of your outgoings and allowable expenses from this amount you’re only left with £10,000. Unfortunately in this scenario the lender would only lend you up to 4.5 times £10,000 which equals £45,000. It’s awful isn’t it? We all know there are pretty limited amounts of houses valued at that price, so unless you have a partner on a decent salary or happen to have a large deposit – you will struggle to get a mortgage. Our sincerest apologies for being the bearers of such bad news.
How to get a mortgage when self-employed
Although the previous section was all doom and gloom, there is one (technically two) options at your disposal which you could look to do to change this.
The main thing to remember is that any lender will always want to see 3 years proof of your business accounting figures. They will check these figures from your SA302 form which is quite simply ‘evidence of your earnings’ as dictated by the figures you’ve inputted in your self-assessment tax return each year. If you want to check these figures yourself for reference and are unsure of how to find this form then please visit here – https://www.gov.uk/sa302-tax-calculation
So the main thing you can look to do is plan ahead and for the next 3 years you don’t claim any allowable expenses within your tax return each year. This can be very frustrating and greatly increase the amount of tax you’ll have to pay each year but you simply have to ‘take the hit’ knowing it’s for the greater good. Then once three years is up you’ll need to apply for your mortgage pretty soon after sorting your third and ‘final’ tax return for this purpose. These figures will then look much more appealing to a lender since it shows your profit is much greater than if you had offset all of your allowable expenses.
Apart from this, your only other option is to become a full-time employee and get paid via PAYE. This isn’t really an ‘option’ since if you’re running a self-employed business then it defeats the object of you being self-employed, but it’s worth noting this is an option if you can do it. In the past we have heard of some self-employed people who were lucky enough to have clients on monthly retainers and upon asking them very nicely they changed their payments from invoice-based to PAYE, but this is in extremely rare cases so please don’t take that as a definitive third option!
And that is the key information you really need to know when looking to get a mortgage as a self-employed person. The main thing to remember is that as a rule of thumb, a lender will lend you 4 – 4.5 times your yearly profit as stated in your end of year tax return via the SA302 form. If this isn’t enough then you may need to look at taking a hit for 3 years and not deducting any allowable expenses.