The property ladder for the Self Employed
Imagine it – you have found that dream home – it may be your first apartment, a bigger place for a growing family or the country cottage you’ve always wanted – so what is stopping you from pursuing that dream.
Here at Rift Accounting Ltd we often have clients advising us that they are looking for a mortgage but are nervous as they are self employed and they have heard it is much harder to get on the property ladder or get a bigger mortgage than if they had a PAYE job.
Industry research shows that over 30% of self employed people don’t seek any advice either from their accountant or a mortgage broker as they believe that they will simply not be eligible, and therefore they don’t pursue their dream.
So let’s think this through, as we look to ‘climb the ladder’, if we consider that there are over 4 million self employed people in the UK who will inevitably between them have irregular incomes or are struggling to put together 3 years of accounts, we can understand why they may believe its not for them – but with some organisation and top tips, they may find that this could all change.
So…..what can you do if you are self employed that will help you get on the ladder and continue to climb it…..
- Get your accounts filed as soon as possible after the tax year ends.
Although it is common knowledge that the tax year runs from April 6th to April 5th each year, research shows that most people file their accounts close to the deadline of January 31st.
There are a number of reasons to file sooner, don’t forget you still don’t need to pay any tax until the end of January (unless you are making payments on account), but you will know in advance how much your tax will be and will be able to budget to put aside the money so that your tax shows as up to date. A broker will need what is called a SA302 when you apply for a mortgage which proves your tax position.
You will usually need at least 1 year of self employed accounts, usually 3 years are required – but check with a broker, there will be numerous factors that they will consider.
If you find that dream property and your accounts have not been filed – you are already putting yourself ‘out of the running’ when it comes to making offers and getting a mortgage agreed.
- Ask your accountant to file your self assessment each year.
Many lenders will ask for an accountants certificate when you apply for a mortgage, which needs to be prepared by the accountant who has completed your accounts. Again, it puts you in a stronger position.
- Speak with a broker
Different lenders (banks or building societies) have different criteria and your broker should be able to help you to be matched to the best lender for your circumstances.
- Plan your deposit
Most lenders require at least 5% of the purchase price of a property as a deposit and you will have to prove where you have got the money from. This would be good to discuss with your accountant in order to plan the withdrawals from your self employed income over a period of time – this will also be well received from most lenders.
- Check your credit file and make sure you are on the electoral role.
- Keep your credit cards under control – don’t let them max out.
- Get an agreement in principle from your mortgage broker.
This is an offer from a lender with regards to how much money they will lend you as a mortgage. This should quite literally ‘open doors’ for you, as any estate agent will know that you are good for the money if they show you a property that you subsequently make an offer for.
Now for the big question…….asked by many who are self employed……
How will a lender calculate my earnings / income to work out how much can be borrowed?
Well it’s a good question, and one in which as accountants we can only offer guidance – the most common way is by looking at the net profit over recent years.
It is so important that you speak to your accountant and ensure that you fully understand your accounts and you are paying your tax on time, it is no longer possible for self employed workers to get a self certification mortgage, which you may have done in the past.
Lenders will consider many aspects of your accounts when you apply for a mortgage including regular spending, how many children you have etc.
Here at Rift Accounting we encourage all business owners to have 2 bank accounts, one in which all of your business transactions are processed, including when your customers / contractors pay you and any purchases you make.
Then either once a week or a month (whatever suits you) pay funds to your other account for personal living expenses – this way your business and personal spending are separate and makes your accounts easier to understand.
Remember if you are eligible for a mortgage, it won’t make any difference whether you are employed or self employed, its about affordability and being able to prove you have the income to make the repayments to buy your home.
Rift Accounting has many years of experience working on self assessment tax returns and would be pleased to work with you to get your accounts in order and your returns in to HMRC, so that you can work with your mortgage broker to buy your dream home.
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0800 8620 840