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Advantages and Disadvantages of Self-Employed Mortgages

Published: 31 October 2022
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Author: Carl Shave - CEO and co-founder
Last updated: 30May2024

Being self-employed can be hugely rewarding but, when it comes to mortgages it can often carry a stigma in relation to the difficulties it brings. Indeed, for some, the complexities of their self-employed status can pose issues when looking into their mortgage options but, to try and help, we have noted below some of the pros and cons when needing a self-employed mortgage.

Advantages:

  1. Could use projections
  2. Access to specific trained underwriters
  3. Flexibility for Company Directors
  4. Same options and rates as PAYE

 

  1. Could use projections: Whilst you may have to provide additional paperwork regarding your earnings, some lenders will take a view to lend based on your projected earnings. This is certainly not something a lender will do for those on PAYE where lending will purely be based on their salary at the time of the application so, having a lender look ahead at what your income could be in the future may make a significant difference to the amount you are permitted to borrow.

 

  1. Underwriters: Due to the perceived complexities of assessing self-employed documents such as business accounts, some lenders will have specifically trained underwriters who solely deal with these mortgage application types. These will have a far greater knowledge of how businesses run and how accounts are structured giving you a much more individual and tailored approach to your loan’s assessment.

 

  1. Flexibility for company directors: Limited company directors can be assessed in two different ways by certain lenders when considering income. This will either be by means of salary and dividends or by salary and net profit. This provides much greater flexibility when being considered by a lender as it provides two variations of your maximum loan. Using a self-employed mortgage calculator can be an ideal way to see what difference this may bring for you.

 

  1. Same options and rates as PAYE applicants: Whilst not strictly an advantage, anyone who is self-employed is not disadvantaged by the mortgages available to them and have the same rates and products on offer. The main difference is how that lender underwrites the application. Self-employed people are also largely able to apply for any government or lender housing schemes that are available such as shared ownership, right to buy, and the deposit unlock scheme.

Disadvantages:

  1.  Extra paperwork required
  2. Less understanding from lenders underwriters
  3. Variable income
  4. Tighter credit scoring 

 

  1. Extra paperwork required: When self-employed, the income used when assessing your borrowing is typically that as shown for the preceding two years. As such you will likely need to provide your last two years tax returns and/or accounts. You could even on occasion be asked for business bank statements as well as your personal ones. Whilst having to provide extra paperwork, lenders do still try to keep this to a minimum as they look to only request what they deem necessary. Being organised is key and having good record keeping can reap rewards.

 

  1. Less understanding from lenders underwriters: Unless familiar with the structures and definitions used when self-employed it is difficult to understand this sector. Many lenders are set up to work on volume and with speed and therefore when things are less understood it can result in misinterpretation and in turn a loan being declined.

 

  1. Variable income: Typically, anyone on PAYE has a set wage and this can be easily verified by means of payslips. Self-employed income is not as straight forward that can and does vary year on year depending on many reasons, including on occasion one off events. The impact of COVID is one prime example.

 

  1. Tighter credit scoring: When applying for a loan or mortgage you will usually go through a credit scoring system. Many of these are automated and based around a point scoring system i.e. you need to get a minimum number of points, or score, to be approved. Whilst lenders give no specifics as to what information scores what level of points it is widely believed that being self-employed scores less favourably than if employed.