The self-employed might feel that banks aren’t their best friends. Banks prefer borrowers to provide a solid and predictable story about their finances: regular job, regular income, nothing too complicated. People who earn well through PAYE and have a deposit may breeze through the mortgage application process.
However, there are over 4.7m self-employed people in the UK and many struggle to gain mortgages. Business owners don’t always pay themselves set amounts at regular intervals. Entrepreneurs may take dividends rather than salaries, or they may feel the need to keep money inside the business – after all, cash is king. But not all lenders seem to understand this.
When applying for a mortgage, business owners need to obtain a declaration of their taxable income from HMRC, known as an SA302 document. Obtaining one is simple, although it may take a few weeks.
Vinnie Morgan is the CEO and founder of BookingLive, a £1m cloud-based booking software business with clients including Greene King and Transport for London. Morgan employs 20 staff and says some of his employees have mortgages, but he is yet to obtain one. “I’ve twice applied for mortgages and, after initial approval, had the mortgages withdrawn very late in the process,” he says.
Morgan believes the complexity of his finances puts lenders off; he has made a director’s loan to his business and pays himself dividends. “I found that income not received via PAYE tends to be ignored,” he says.
But some lenders will take information about the company. A lender may accept information from your accountant, such as profit and loss accounts, as well as information regarding dividends and loans. However, this too can be an issue, as accounts are not completed until many months after the year’s end. Similarly, self-employed people don’t file their tax returns until January 31, even though the tax year ended the previous April. This means many self-employed people lack up to date information.
Julie Waddell, founder of hummus and dips brand Moorish, struggled to secure a mortgage despite earning a salary of £72,000 and her business producing annual revenues in the region £500,000 per year. Eventually, she found one, but then rapidly needed to produce up to date accounts.
“I had to put a lot of pressure on my accountant and spent what felt like days going backwards and forwards answering questions about what everything on the bank account was that year,” she says. “We needed to be in the house by mid-May as our landlord was moving in to the rented property we were living in. That meant getting the accounts done in two weeks, leaving the rest of the time to exchange and complete.”
Charles McDowell, commercial director at Aldermore Bank, says it is unjust that the self-employed have struggled for too long to obtain a mortgage. “There are nearly five million self-employed people in the UK, that’s nearly 16% of the workforce. They are vital to our economy and much of the economy growth of recent times is down to them. They have been bold enough to create work for themselves and we within the mortgage industry need to be bold enough to back them.”
Since January, Aldermore will now consider borrowers with just one year of accounts, rather than two, as long as those accounts are prepared by a qualified accountant. Business owners will be asked to provide an SA302 and overview documents from HMRC. McDowell says that business owners that pay themselves dividends or retain profits within the business need not worry, as Aldermore takes such income into account.
“We understand business owners need to keep funds in their businesses to aid cashflow,” says McDowell. “Also, many pay themselves dividends, not just salaries. So we look at all the information in order to gain a full understanding of a person’s true financial position.”
McDowell says many entrepreneurs perceive that gaining a mortgage is going to be difficult, and that this puts many off from trying. “Many will have heard that banks don’t like lending to the self-employed so will be put off from trying to gain a mortgage. However, it’s important for them to know that there are options out there for them.”
Five tips for the self-employed
Think beyond the high street: Many potential borrowers head to their personal bank but this can lead to disappointment. High street lenders are not necessarily the best for the self-employed, so it pays to think more widely. The UK is home to a diverse and highly competitive banking sector, so test the market or speak to an independent mortgage broker.
Research thoroughly: Banks are suppliers and should be treated as such. Before making an application, ask them what criteria they take into account. Will they consider dividends? How many yearly accounts will they require? If such questions baffle those you’re asking then they might not be the lender for you.
Prepare your paperwork: Your finances are more complicated than those on PAYE, so get them into good order. Discuss your needs with your accountant and give them time to obtain your SA302 and accounts with the headline figures marked clearly. It might also help if they write a letter on your behalf, explaining your company’s financial situation as simply as possible.
Understand your credit history: There are a number of credit bureaus that provide credit reports (such as Experian) that are a great way to understand your credit history and can give tips to improve your financial health.
Store up the biggest deposit possible: Ever since the financial crash, lenders have been wary about lending to those without sizeable deposits. Criteria vary and some specialist lenders (such as Aldermore) can lend up to 100% of the value of the house, however, having a higher deposit increases the chance of an offer being made.
Content on this page is for and produced to a brief agreed by Aldermore, sponsor of The Disruptors on Guardian Small Business Network.
