When are you considered self-employed?
You will be judged as self-employed by a mortgage lender if you own more than 20% of a business that provides your main income. That applies whether you’re classed as a contractor or freelancer, and if you’re registered as a sole trader, director or in a partnership.
Depending on your status, you may need to provide slightly different documentation and proof of income, which we cover in more detail in a later section. But in all cases, it’s best to be prepared by organising your personal and professional finances in advance, and planning for costs including your deposit and fees.
If you have everything in place, it means you can move more quickly when housing markets and mortgage rates are most favourable to your specific circumstances. Which means you won’t miss out on a dream property at a bargain price, or get caught out by rising inflation.
What’s different for contractors, freelancers and company directors?
If you’re a sole trader, then you’ll need to provide SA302 forms or HMRC tax year overviews for the past 2-3 years, and lenders will mainly focus on your net profit by taking an average of those figures for your typical income.
Contractors and freelancers will also need to show proof of previous, current and upcoming contracts, along with your self-employed history and accounts. Any evidence of previous work in the same field or industry can also help, such as PAYE records from past employment.
Most lenders will understand breaks of up to four weeks between contracts, but any longer periods may cause issues. Working under an umbrella company may mean your expenses aren’t considered, so it’s worth speaking to a specialist for advice.
If you work on a freelance basis within a partnership, you’ll need to demonstrate your share of profits.
Limited company directors will be required to show proof of dividend payments or retained profits, and lenders will look at your salary and dividends, or your share of net profit, to determine how much you might borrow. It’s worth remembering that funds retained in the company for tax purposes, for example, won’t be considered. And shareholders not named as parties to the mortgage may negatively impact your borrowing potential (for example, if your partner or spouse is a shareholder but isn’t named on your mortgage).
In all cases, speak to a self-employed mortgage specialist to get expert advice on the differences, and whether you may want to change the way you work, in preparation for a mortgage application.
Home mover mortgages when you’re self-employed
If you already have a mortgage on your home and want to relocate, then there are a few things to consider if you’re self-employed. As with a new application, it may involve some additional effort to prove your financial situation, especially if you’ve started working for yourself since taking out the original mortgage.
To move to a new house before you’ve paid off your mortgage, you can potentially settle the amount, which usually involves paying an early repayment charge to the lender. Or most providers will offer the alternative of transferring (porting) your mortgage to a new home.
Lenders tend to treat porting a mortgage as a new application, so you’ll need to provide proof of identity, income and financial records. You’ll also need to pay valuation fees for the new property, and any costs for additional borrowing if you need to increase your mortgage amount.
If it’s affordable, taking out additional funds is a possibility.. Any new borrowing is normally raised on a current mortgage product, rather than being added to an existing rate on your current debt. So, you may find the extra amount is on a higher (or lower) interest rate depending on the market at the time.
When downsizing or moving to a smaller mortgage, you can potentially overpay the debt within any maximum limits set by the lender to bring down the amount owed. This is useful, as applications are likely to be rejected if the loan to value is significantly different. For example, if your new home is worth less than the value of the mortgage you currently have.
If you do decide to port your mortgage and move to a new house, the transfer needs to happen on the same day as your purchase is completed, otherwise you might incur an early repayment charge. You’ll need to complete the purchase and sale simultaneously, and ensure that you’ve explained this to your conveyancer.
Once again, if you’re thinking of buying a new home and porting your mortgage, it’s advisable to speak to a broker that specialises in mortgages for the self-employed, such as CMME, who can advise you whether it’s better to transfer existing debts or repay the amount based on your individual circumstances.
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