How Much Finance Can the Self-Employed Access for a Mortgage?
The average house in the UK cost around £227,000. The average age in the UK for a first-time property buyer is 30. The average income of a first-time buyer is £41,000 per year. Whilst paying rent, bills and all other expenses such as travel and food, it would take a lifetime for a 30-year-old Brit to save enough money to outright buy a house. Welcome, then, to mortgages.
Mortgage, a loan from a bank or building society to aid paying for a property. This is a great way for young people to get into the property market. However, with mortgage loans estimated by annual income, how much mortgage can the self-employed receive?
Although it may be more difficult for the self-employed to get a mortgage, there is nothing stopping them getting just as much of a loan as the employed. Usually, the maximum a person can borrow is the equivalent of up to five times the amount of your proven annual income. For first time buyers this simple multiple is often restricted to 4.5 times. This varies between different providers, however, with some offering around four or four and a half times the annual income. As well as this, both the self-employed and the employed will be required to pay a deposit towards the house. The bigger the deposit, the better the loan interest rate you will be offered.
Types of Self-Employment
Mortgage loan providers vary in what they require from a potential borrower and this can affect how much of a loan they can receive. The type of self-employment a business is classed as legally impacts on the loan amount. As a sole trader or a partnership company, lenders will look at the profits received by the sole trader or both pairs of the partnership. They may assess net profits as a source of income. This differs for limited companies. The director of a limited company is classed as self-employed, and hence will need to follow the same steps as a sole trader or partnership in supplying loan providers with evidence of income. As directors usually take a salary from a limited company, this may be lower than the profits of a sole trader or partnership. This could result in them receiving a smaller loan. For limited company directors, it is essential to find a lender that will look at company profits, dividends as well as individual salaries. If not, gaining a significant mortgage will be more difficult.
Once you’ve hired a certified accountant to check over your accounts or filled out a self-assessment tax form for the lender, it is important to discuss a deposit. Some self-employed first-time buyers may wish to wait just a little while longer before applying for a mortgage in order to save a larger deposit.
Again, annual income will affect borrowing amounts. The more you make, the more you can borrow – higher numbers give the lender peace of mind that you will be able to repayment your mortgage in monthly instalments. If you’re company is just starting up, it may be worth waiting a while before committing to a mortgage. The average citizen of the UK with a mortgage will have paid it off by the time they are 69 – remember it’s a lifetime commitment!
The average UK house bought with a mortgage could be paying between £284,247 and £381,018 over the span of the payback period. This is, of course, dependent on interest rates and the type of loan you take out. Standard variable rate – SVR – mortgages have notoriously high interest rates, whereas tracker rate mortgages and fixed-rate mortgages are much lower. Tracker mortgages track an external base rate (usually the Bank of England’s base rate) so can fluctuate across the whole repayment of the loan. Fixed-rate mortgages stay the same for an initial period of around two to five years, then revert back to an SVR mortgage – watch out for this & swap to a new fixed rate to avoid a jump in payments.
In short, being self-employed should not stop you from getting the same amount of loan as the employed. Yes, it may be more difficult, but if you have enough evidence that you can afford to repay the loan and have done research to find the perfect mortgage deal for you – then there is nothing stopping you.