Getting a mortgage when you’re a contractor, self employed or own a limited company

One of the many challenges of starting your own business and going it alone as a contractor, self-employed sole-trader, or owner of a limited company, can be getting a mortgage.

Without proof of a regular salary being paid by an organisation, proving your income is sufficient and reliable enough to meet mortgage repayments falls on you.

Like applying for a mortgage if you were in a salaried position, you will need to have a sufficient deposit and meet affordability requirements.

However, unlike applying for a mortgage with a standard job you will need to provide additional documentation and be aware of a few extra hoops you may need to jump through. If you’re finding high-street lenders a challenge, there are also specialist lenders and brokers who can help.

Deposit and loan to value ratio

Just like borrowing with a salaried job you will need to have a mortgage deposit of at least 5% of the value of the home you would like to buy, but the bigger your deposit the easier it should be to get a mortgage and you can typically access lower rates.

Different mortgage rates are available depending on your loan to value ratio (LTV).

To find your LTV simply work out the percentage size of your deposit and deduct it from 100, the LTV will be the remainder. For example, if you have a 20% deposit you can get a mortgage with a 80% LTV.

Lenders tend to offer mortgage rates in LTV increments of 5%, starting at 95% and finishing at 60%. The fixed 5% increments mean it’s worth making taking time to save more if you’re on the edge of getting to a better threshold.

So, if you had an 18.5% deposit you could be offered the same rates available to a borrower with a 15% deposit, but if you saved up just 1.5% more to get a 20% deposit you could get access to lower rates.

It’s also worth noting that if you wish to buy a high value home worth more than £1,000,000 you may struggle to get a mortgage without at least a 25% deposit, although it is not out of the question if affordability is proven.

Affordability requirements

Ever since the Mortgage Market Review (MMR) was published in 2014, lenders are obliged to perform affordability checks before offering a mortgage.

This means in effect, instead of just looking at your income, mortgage lenders now consider your overall financial health and take a close look at your outgoings.

This is often more helpful way of assessing income for a contractor, the self-employed or a director of a limited company who has retained profits within the business.

Income vs outgoings

Normally lenders will apply a multiplier to your income, for example if you earned £25,000 a year, a lender might multiply this figure by four to arrive at a mortgage offer of £100,000. It’s unusual to have annual income multiplied by more than five, but may be possible from specialist lenders.

For a contractor some lenders will consider a short term contract and then annualise it before applying the standard multiples. This can mean that a contractor may be able to secure a much higher mortgage that they may expect.

As mentioned above, mortgage lenders will also consider your outgoings when deciding how much to offer you, which can include:

• Existing monthly repayments for loans and credit cards
• Childcare costs (or maintenance payments)
• Car tax and insurance
• Council tax and utility bills for the home you want to buy
• Insurance payments

If they determine you won’t be able to comfortably handle mortgage payments in addition to your existing commitments, they won’t offer you as large of a loan, or possibly may not lend to you at all.

Read the uSwitch guide on mortgage sizes you can get to find out more.

Can you use your limited company profits to borrow?

This may be possible with some specialist lenders and could considerably boost your borrowing power.

For example, if your company has been making annual profits of around £150,000, but your salary has been £30,000, with a normal lender you could typically only borrow around £120,000-£150,000.

But, if a specialist lender will consider your company profits, you might be able to borrow around £600,000.

However, it’s worth seeking independent financial advice before going down a niche route like this.

How do you prove income?

Applying for any form of credit when you’re self employed will require official documentary proof of income.

For mortgages, you will often need to provide at least three months of business and personal bank statements as well as one or more of the following documents:

• Finalised company accounts
• Self assessment (SA302) tax form
• Accountant’s reference

What if you’re a company owner with bad credit?

Your credit score is one of the most important things to take into consideration when applying for a mortgage.

Unfortunately it’s not unusual for company owners to have an adverse credit history.

Even highly successful entrepreneurs will have taken financial risks to get their business to succeed, which may have lead to county court judgement (CCJs), individual voluntary arrangements (IVAs) or even bankruptcies on their credit history.

If this sounds familiar, the bad news is there is no easy way to get a mortgage without taking time to rebuild your credit score.

The good news is that time is a great healer and if you can wait, even just one year of responsible borrowing, not missing payments and keeping a steady address history should get your credit report in a better state to borrow.

If you can’t wait for your credit to improve to get a mortgage, a specialist lender or broker should be able to help, and if need be products like guarantor mortgages could be helpful.

But, if you can wait, it is sensible to rebuild your credit score before applying for a mortgage.

Can you get a mortgage if your company has been reporting losses?

If you own a company that has declared a loss within the last three years, getting a mortgage could be difficult (especially if the loss was in your last trading year), as lenders may be deterred by a lack of reliable income.

If the loss was two or three years ago, you can provide a satisfactory explanation and you’ve shown signs of making a strong recovery, lenders may overlook the loss.

It’s also worth noting if you have been paying yourself a decent salary and deducting this before profits, you may still be able to get a mortgage despite reporting a loss.

Can you get a mortgage if you’ve recently changed trading style?

It’s fairly typical for sole traders to change trading style to a limited (ltd) company as they start making more money and trading in larger sums, to separate the company’s affairs from their personal ones.

However, changing trading styles can make it a challenge to get a mortgage. Less flexible lenders may consider this a completely new business and will require at least 12 months (possibly up to three years) of trading under your new name before considering your mortgage application.

So if you have done this, it may be worth seeking out a specialist broker or lender who can consider the record of your previous business as evidence of income.

This makes a CV of your work history very important, so try to keep a record of your experience in your particular field as this may prove extremely helpful to you when speaking to your specialist.

What type of mortgage should an owner of a limited company get?

There are three main types of mortgage rate with different benefits and drawbacks, there is no hard and fast answer of what type of mortgage is best to get, rather you should consider what matches your circumstances.

• Fixed rate mortgages – These mortgages have a rate set for a number of years, giving you peace of mind that the price of your mortgage won’t change.
• Tracker mortgages – This will track the base rate of the Bank of England. This means (in theory) the price of your mortgage will roughly move with how well the national economy is performing. Usually this means when times are good you’ll pay more and less when times are tight.
• Variable rate mortgages – These will have a rate determined by your lenders ‘standard variable rate’ – traditionally the cheapest initial rate, but can it go up at your lender’s discretion.

Read more…

• Guarantor mortgages – There are a number of ways parents can help their children get on the property ladder, such as guarantor or family assisted mortgages
• Residential mortgages – Residential mortgages are the largest, and one of the most common, forms of credit in the UK, and make it possible for millions of us to buy our homes.
• Mortgages for the self employed explained – If you are self employed and complete your own self assessment, you will need to be able to demonstrate sufficient proof of your annual income if you want to get a mortgage