Many years ago, a trio of salary slips was enough to get you a mortgage. Today, it’s not that easy as the credit crunch lenders have tightened up and are more cautious. The development of the new ‘mortgage market review’ has worsened things. Now, you not only have to show your income but your capacity to handle mortgage payment along with your daily expenses and rise in interest rates.
Mortgage market rules have changed making it very difficult for freelancers, whose income can fluctuate every month. Hypothetically, freelance and self-employed workers must have the same access to mortgage deals as full-time employed individuals, provided the former produces income statements worth 2 or 3 years.
Different Assessments for Self-Employed
However, the reality is not as straightforward. Self-employment is complicated as workers can set themselves up as company directors, solo traders and contractors, each of them assessed in different ways. For example, contractors can be examined using bespoke underwriting procedure, which calculates annual earnings, assuming the contractor has at least a 3-month contract.
Company directors are mostly assessed by the wages and dividends they draw. If you are one of those who keep the majority profits in company accounts to reduce the tax bills, you are better off finding a lender who can assess you based on your company’s net profits.
According to the managing director of Freelance Financials - John Yerou, one lender may offer more than the other as they have different methods of assessing your affordability. He also believes that branch advisors have more dealings with employed people than the self-employed ones, a potential roadblock for lending mortgage to freelancers.
The lending attitude
New comers in the freelance market find the situation even more challenging. With bank statements showing less than a year’s transactions, you are very unlikely to qualify at all. However, there are few lenders who may consider mortgaging after you are a year old in business. According to Craig McKinlay, director at Halifax mortgages, lenders assess each case individually and applications under three years of account details may be referred for assessment to an underwriter.
If a lender is happy with the evidence provided, that support your mortgage affordability going forward, your route is clear. You will have to ensure that your accounts are stable and they have no major issues. There must be no signs that show that your business is failing. In short, showing a sustainable income is the key.
Clydesdale Bank and Kensington Mortgages are two lenders with flexible rules, says David Hollingworth of London and Country Mortgages. And even with them, people still have to meet affordability criteria. It all burns down to your credit score. First time mortgage buyers or people with small deposits might find it hard due to low credit scores. You will have better chances if you are going up the ladder, have a good credit sore or you’ve already taken a mortgage.
The same considerations apply when you are choosing the most suitable type of mortgage, even in the case of company-employed people. Offsetting (reducing the interest of your mortgage by keeping a cash account with your lender) could make life easier for freelancers and the self-employed. As Hollingworth puts it, offsetting is preferred by many self-employed workers as they can accumulate cash on one side each month, lighten their tax bills and lessen mortgage interest. This is more attractive if you have a varied income as it increases your ability to do all the three – better access to mortgage, lessen your tax and reduce mortgage interest.
While some brokers are happy to offer services for free, others charge a considerable fee. This fee could be worth spending if you can access a hassle-free mortgage. You may find a broker who knows what each lender is offering and use his ongoing relationship to get you the best deals.
However, a broker cannot offer the facilities enjoyed by a fulltime employed worker.
The message is loud and clear. Be prepared for a not-so-smooth sailing. According to Ruth Wilson, a PR professional, it was shocking how hard and how much a freelancer had to work to get on with his mortgage. Even after the mortgage is approved in principle, the number of forms that must go back and forth takes a lot of time.
As you see, getting a mortgage as a freelancer is not the most pleasant business. The information provided above aims to help you be prepared mentally and handle the tough road with confidence.