Earlier this year, we looked at how it can be tough to get a self-employed mortgage without the right advice, and how the pandemic was affecting borrowers who work for themselves.
One of the main issues that many business owners face is how they can prove their income to a lender. Some banks only use your net profits, while others might also consider profits retained in your business or, if you’re a contractor, your day rate.
Our free guide to self-employed mortgages explains this further.
Without the right advice, finding a lender who will agree the amount you need can be tricky. Now, a new survey has found that more than half of self-employed renters and people waiting to buy feel that mortgage lenders are not doing enough to support them.
Read on to find out more, and for some useful clarification about the rules surrounding “contractors” after changes to the IR35 rules earlier this year.
56% of self-employed renters think lenders don’t do enough to help them
New research from Aldermore has revealed that self-employed borrowers don’t believe lenders understand their situation or are doing enough to help them get the mortgage they need.
In the survey of 1,000 self-employed adults, just under a third thought that mortgage lenders fully understood their earning capabilities when they applied for a mortgage.
Around half said they thought their lender only partially understood their earning potential, with 21% saying that their mortgage lender did not understand their earning capability at all.
Just under a third of those surveyed also said that being self-employed was the main reason they were rejected for a home loan.
Overall, around two-thirds (64%) believe that the self-employed are treated worse by lenders than those with a salary.
Aldermore’s head of mortgage distribution, Jon Cooper, said: “The UK is an entrepreneurial nation, and the growing self-employed workforce is integral to our economy, so it is disappointing to see persistent barriers for them when seeking to secure a mortgage, which appears to have been exacerbated by the pandemic.”
When it comes to self-employed borrowers, criteria vary significantly from lender to lender. This is why it can really pay to seek specialist advice from an experienced broker before starting your search.
We work closely with many lenders on behalf of self-employed applicants and have enjoyed significant success when it comes to getting the borrowing these clients need.
Whether you’re a sole trader, partner, director of a business, or a contractor, we know which lenders are likely to look favourably on your application. We also know how lenders treat “earnings” and so can therefore maximise your borrowing potential.
How lenders have adapted to the new IR35 rules
Earlier this year we looked at changes to the IR35 rules and how these might affect self-employed borrowers, particularly those with umbrella companies.
Since the new rules came into force, lenders have adapted their own criteria and so may be useful for you to understand how lenders are now treating contractor clients.
Essentially, a lender will generally treat you as self-employed if:
- You pay your own tax, or
- You have more than one contract, or
- You have set up a limited company and you employ other contractors.
A lender will treat you as employed if:
- Tax is paid by the company you work for, or
- You are employed via an umbrella company who deduct tax, or
- You are a contractor who earns more than £500 a day or £75,000 a year, or
- You are an IT contractor on any income.
If you’re a contractor who pays your own tax or it is deducted by umbrella company (including IR35), you will typically have to provide a copy of your latest contract and latest payslip. If payslips are not issued, you’ll have to supply your latest bank statement.
In terms of income, a lender will use the lower of the gross value of the contract, or the income calculated from your payslip/bank statement. A lender will typically apply a formula to calculate the gross value of the contract – for example, day rate x 5 days a week x 46 weeks a year.
Where income is calculated from a payslip/bank statement this will typically be the gross pay annualised, before applying a 46-week year to correspond with the calculation from the contract.
Of course, specific criteria will vary from lender to lender, which is why it can really benefit you to speak to us before you start the process. Our experience and knowledge mean we know which lenders to approach to give you the best chance of securing the borrowing you need.
To find out how we can help you, please get in touch. Email [email protected] or call us on +44 (0) 20 3411 0079.
