Self-employment is an increasingly popular lifestyle and career choice for many. But while the benefits of being your own boss and the flexibility afforded are something to celebrate, the path can be littered with challenges.
Obtaining a mortgage is one of them.
It’s not easy. But, in my two-part blog series I help show you how to prove your self-employed income for a mortgage and I list below my 6 tips to help boost your chances of getting a mortgage.
Here are my 6 tips:
1 – Be organised and up-to-date with your record keeping
Lenders want the most up-to date accounts.
Unfortunately, the filing deadlines for company accounts and self-assessment tax returns (9 months and 12months after accounting year end respectively) encourage many self-employed to complete all their record keeping and preparation of accounts only just before the cut-off date.
Not only do you risk not having a clear picture of your financial situation but you won’t have the most up to date financial information to present to your lender.
Taking the time to set up good bookkeeping procedures and systems will always pay dividends in the long run (you can read more here). Then, by keeping on top of the weekly bookkeeping you will be in a much better position to produce up-to-date accounts.
Ideally you or your accountant should prepare the accounts as soon after the accounting year end as possible. For many sole traders this will mean 31st March or 5th April.
2 – Aim for higher and consistent profits
Ideally you need to present your lender with figures that demonstrate consistent and ideally increasing turnover and profit across 2 to 3 years.
This is much easier said than done and here’s why.
If you’re a sole trader, you will have reduced your taxable income by offsetting tax allowable expenses. With a lower taxable profit you will pay less tax. This is completely legal and above board.
So, if you are thinking of applying for a mortgage you may need to consider whether you claim for all the tax allowable expenditure. By not claiming for all your expenses, you will pay more tax but you will be declaring a higher profit to satisfy lenders criteria.
If you’re a limited company director, a good business decision might be to retain more profit within your business in order to fund future growth and expenditure in your business. Unfortunately, this will mean that the dividends and salary you take out from the business will be lower than they might have been had you not kept the profit in the business. Lenders like to focus on your income (dividends and salary). So, your best plan might be pay yourself a fair or higher dividend against your profit for a few years.
Achieving a consistency in business performance can be tricky. If you’re a freelancer, one month it’s a feast and the next month it’s a famine. Income patterns are anything but consistent.
In these circumstances, you will need to “know your numbers” (see below) and be able to explain with confidence any dips over a period of time.
3 – Know your numbers
Fans of Dragon’s Den will know how important it is, for those pitching to secure finance and investment from the dragons, to “know their numbers”. It’s no different, trying to get a mortgage.
If your accountant has prepared your figures make sure you take the time to talk through your accounts so that you are confident in understanding your numbers and can explain any fluctuations over time. Having the knowledge and confidence to field your lender’s questions will stand you in good stead.
4 – Avoid changing business structure
Lenders love stable businesses!
If you are currently a sole trader or part of a partnership and thinking of incorporating your business, it would be wise to delay the move until after your mortgage application has been approved.
If you don’t want to delay incorporation, then it would be best to postpone your application for a mortgage – give the company time to settle down before you put forward your application.
5 – Pay your bills in good time
Proving your income will be a main focus for you but don’t lose sight of other factors that lenders will review such as credit history and saving for a sizeable deposit. In the year up to application it would be sensible to try and pay off debts as they arise.
6 – Obtaining professional advice
Limited company director
You will need an accountant to prepare limited company accounts.
Your lender may also require an accountant’s certificate. Sometimes lenders request this additional certification when the SA302 and the tax overview aren’t sufficient to explain variations in dividend income. There may also be timing differences between the company year end and the tax year which means the dividend income reported in the SA302 might lag behind the dividend income reflected in the accounts.
Accountant’s usually charge an additional fee for this service so make sure you have the discussion in advance with your accountant.
Lenders often insist on accounts being produced and signed by a Certified or Chartered Accountant. You can find a directory for Chartered Accountants here or you could look me up here.
Sole director or partnership
If you’re a sole trader or partner, the main documentary evidence required is the SA302 and tax overview. You should be able to produce these yourself and you can find instructions here.
If you have been managing your own bookkeeping, accountants can provide additional assistance in a number or ways;
- By preparing accurate accounts for your small business
- Taking the load off your shoulders and enabling an early submission of your tax return
- Offering advice on the best way to utilise trading losses and the level to which you need to offset expenditure – helping to show your numbers in the best possible light.
One of the key benefits to having an accountant on board is that they can help with advance planning on how to reflect your numbers in the best possible way (in a legally compliant way).
Yes, there is a lot to think about and it can be a bit of a minefield but if you want to take away my top recommendation -it would be to plan ahead. Give yourself some lead time to plan both your business and your personal finances and if you do, you will be well on your way to successfully securing a mortgage. If you need support in this area, here’s how I can help.
Recent developments in the economy have included the rapid growth of the ‘gig’ economy which has seen employment patterns change. There is now evidence on the high street that lenders are starting to adapt their previously outdated criteria for this market. Hoorah!
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