How do you know if a mortgage lender considers you self-employed or an employee? What are the criteria? Find out how they see you, and how a broker can help Nov 26, 2019Views: 297
Do Mortgage Lenders Think You’re Self-employed?
Are you self-employed? Seems like a simple question right? Well it should be but when it comes to looking for a mortgage it might not always be so straightforward. Different lenders may view your employment status in different ways, and this is particularly if you are a company director. This can have major repercussions when it comes to successfully applying for a new mortgage deal. So, what are the facts? In order to simpli fy the process, we’ve produced this guide.
Who is self-employed?
First the legal position. Did you know that in the U.K there is no one official definition of the term ‘self-employed’? HMRC does provide a guide to who may be categorised as self-employed, but they are only really concerned about your status in relation to the amount of tax paid. A mortgage lender may see you differently.
Will mortgage lenders think I’m self-employed?
For some people it is pretty certain that a mortgage lender will consider you to be self-employed and treat you accordingly.
For the majority of lenders, anyone operating as a sole trader, or working as a freelancer or a contractor will be treated as a self-employed applicant. However, if you’re unsure thinking about how you pay tax is a good indicator of what your employment status is.
In essence if you are responsible for paying your own tax and National Insurance, via Self-Assessment, then a lender will generally consider you to be self-employed.
As you handle the payment of tax yourself, rather than paying through PAYE, lenders will ask for SA302 forms – available from HMRC – in order to verify your income.
I’m a company director; will mortgage lenders treat me as self-employed?
While the majority of self-employed people don’t pay any tax through PAYE, the picture may be slightly less clear for company directors. This is because some company directors are also paid as salary as an employee of the company of which they are a director.
Regardless of this, for most mortgage lenders the deciding factor in whether they will treat you as self-employed is the percentage of your holding in the company. If you own more than around 20% to 25% of the business, then you’ll tend to be treated as a self-employed person.
If this sounds like your situation then you will probably find that lenders will accept payslips as proof of the income you receive as an employee, but may also consider income as dividends and retained profits as income. The picture really does vary from lender to lender, so it’s important that you have a handle on each lender’s criteria.
What if I work on both an employed and self-employed basis?
It’s not just company directors who receive income both as an employee, and in another capacity. More and more people work for an employer - often on a part-time basis – while also working as a contractor or freelancing.
In cases such as these, mortgage lenders will look at where the bulk of your income comes from, for example if you work primarily as a teacher but carry out some self-employed work marking exam papers then lenders will focus on your income as an employee. However, this doesn’t mean that they will disregard your other income when they are making a decision on your ability to meet your mortgage repayments.
Do I need to speak to a mortgage broker?
Allowing a mortgage broker to handle your application can be advantageous. For a start brokers understand how lenders will assess your employment status. Lenders criteria aren’t always fully transparent, and it can be frustrating if you have to make an application before they are clear on whether they feel you are self-employed.
As brokers process all types of applications every day, they are much clearer about what lenders are looking for. Lender criteria changes over time, so working with a mortgage broker, who will have the most up-to-date information, can help you to apply to the right lender.
Similarly, even if you are clear that you are self-employed, as we have already mentioned not all lenders will consider all forms of income ‘acceptable’ when it comes to demonstrating your capability of affording a mortgage deal. This is particularly true for company directors who want retained profits included as part of their income. Again, a professional broker who is used to preparing applications for company directors will know which are the most sympathetic lenders in such cases.
Overall, understanding your employment status in the eyes of mortgage lender is a key first step to a successful mortgage application. It may not always straightforward to ascertain, but it’s always worth speaking to a professional who can help you choose the right lender.
Is there a tool to tell me how a lender will see me?
Individual personal circumstances mean each application is different and each mortgage lenders criteria can be slightly different, so most lenders and brokers do not publish any advice or tools.
However, at Simply Lending Solutions we specialise in helping the self-employed, company directors and those with unusual mortgage circumstances get mortgages. We also have whole market access; this means we deal with most lenders regularly and understand how they view limited company directors, sole traders and everyone in between.
With this wealth of experience, plus having helped and supported those who’ve had adverse credit history in the past, we have created a guide and several tools to help you accurately determine your employment status. We also have developed tools to show you much you can borrow and the likely interest rates. To use these tools and understand your employment circumstances better head over to our self-employed mortgage calculator.
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