Getting a Mortgage if You’re Self-Employed
A mortgage is one the most innovative and competitive markets in the world where most borrowing is funded either by mutual organisations such as building societies and credit unions or proprietary lenders such as banks.
What is Mortgage?
A mortgage can be defined as a legal agreement by which a bank or a society lends money at interest in exchange of the title of the debtor’s property, subject to a condition that the conveyance of the title will become null and void once the debt is repaid and is more commonly used by the individuals and businesses to make large real estate businesses without paying the entire amount upfront. Mortgages are also known as liens against the property or claims on the property and in case the borrower has stopped paying the mortgage, the lender can foreclose.
In other words, a mortgage is a loan which you take to buy a property and generally, you have to put down a deposit for at least 5% of the property and based on the type of mortgage you want to opt for, you can borrow rest of the money from the lender and then based on the monthly payment plan, you will pay the amount till the loan is repaid in full. During the initial years of the mortgage, a larger proportion of your monthly payment will go towards payment of interest and the smaller amount will go towards your capital, however, with time it will be the other way round i.e. you will pay more of your capital over time as you approach towards the final or last leg of loan repayment.
The amount of interest you pay on a mortgage depends on the type of mortgage or the mortgage deal you have opted for, for example if you have opted for fixed-rate mortgage, then you will be paying interest at a fixed rate for the term or duration of the mortgage and if you have chosen a variable rate mortgage, then the amount of interest you pay will vary with time.
Also Read: Register as Self EmployedThere are various forms of mortgages such as:
- Adjustable-rate mortgage- Under this type of mortgage, the interest rate on the mortgage is fixed for an initial term and then it fluctuates as per the market rates and to make it more affordable, the interest rate under this type of mortgage is lower as compared to the market rate and thus makes it more affordable for a short t-term. However, for the longer-term, it may or not be an ideal choice because the interest rate is subject to change after a particular period and in case it increases, then it becomes difficult for the borrower to pay the increased or higher monthly payments. Similarly, if there is a decrease in the market rates, the adjustable-rate mortgage will become less expensive for the borrower. So, because of the changing interest rates, the monthly installments are unpredictable after the initial term.
- Fixed-rate mortgage - Unlike an adjustable-rate mortgage, under the fixed-rate mortgage, the borrower has to pay a fixed rate till the time loan is either complete or waived off i.e. the monthly principal and interest payment never changes from the date of a first mortgage payment to the last and most of the fixed payment mortgages have a time duration of 15 to 30-year term. Interest-only mortgages and payment-option adjustable-rate mortgages are less common types of mortgages and are more commonly used by sophisticated borrowers.
- Interest-only mortgage - Under this type of mortgage, the borrower only has to pay the applicable interest on the principal amount he has borrowed from the lender. For example, if the principal or loan amount is £90,000 and the interest rate is 5.6% annually then the mortgage paid will be the monthly interest payment i.e. £90,0000*5.6% = £420.
- Buy-to-let mortgage - This is a form of commercial mortgage which is used to purchase residential real estate to let it pay to the tenants.
- Right-to-buy mortgage - Normally this kind of mortgage is in connection with the right-to-buy your home legislation for council or housing association tenants.
- Non-status mortgage – Under this type of mortgage, the borrowing amount is independent of the income of the applicant. However, it requires the guarantee of the applicant stating that he can afford the repayment of the mortgage.
When you sell your property or move house, there will be different mortgage options available from which you can choose the one suitable as per your need. However irrespective of the type of mortgage you are opting for, you must be very sure that you can afford to pay the monthly payment as per the applicable interest rate because the UK government has taken a stricter rule in terms of lending criteria. Especially if you are self-employed or a small-business owner, mainly because the demand for a self-employed mortgage is on high. As per the Office for National Statistics, the number of self-employed people in the United Kingdom was at its highest level in the year 2014.
If you are a self-employed person and want to go for a mortgage, then before lenders consider giving you a mortgage, you will be asked to submit sufficient proofs to prove the affordability of mortgage, not only in the present but also in the future. Affordability of the mortgage for a self-employed is mostly assessed by the income and expenditure statement and thus you will be asked to submit proof of your income to get a mortgage. There are various proofs of income which you can submit to show your affordability of the mortgage, such as:In addition to the income proof, as a self-employed you will also be required to submit below-mentioned documents to get a mortgage:
- ID proof: You need to submit your ID proof i.e. a valid photographic ID such as driving license having your current postal address on it
- Deposit: You need to submit a statement showing funds held and a build-up of funds and in case, if funds are a gift from a family member you need to submit a declaration form from them stating the transfer of funds.
- Background buy-to-lets: In case you have a buy-to-let property which is your source of income, then you need to submit the Tenancy Agreement and three months' bank statement.
- Life insurance or any other protection: Lenders will look for any life insurance which you might need to submit if asked or required by the lender to assess your affordability.
- Limited company accounts: For a limited company director, then you need to submit the last two years of fully signed accounts.
If you have been self-employed for at least a year or plus, the chances of getting the mortgage become higher. The duration of your self-employment is quite a comforting factor for the lenders because most of them will ask for at least three years accounts to prove your income, however, it is not that you will not get one if you have just started with your business because the lending criteria will not only assess the account statement or the duration of your business but considers lot many other factors as well and the decision or the lending criteria varies from case to case. A lot comes down to your business structure as well i.e. if you are a sole trader or a contractor or a partner or a company director. Because you will be assess as per your business structure such as:
- If you are a sole trader, then you will be assessed depending on if there is either an increase or a decrease in your income. Lenders will take a different approach in case of an increase and decrease in the income i.e. if the income has increased, then they will take the average income from the last two or three years and if there has been a decrease in the income, then the lowest and highest figure will be considered to assess your affordability.
- If you are a contractor, the lenders will assess your affordability by multiplying your daily rate with the number of working days in the year. Your previous track record will also be assessed before a mortgage is granted to you.
- If you are a company director then your income will be assessed by two methods such as: In the first method, your salary as a director of the limited company will be assessed in addition to the profits generated and retained in the company and the second method, your salary and any dividends from the salary will be used to assess your income and thus to assess your affordability.
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