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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, 2019
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.
Breaking records and unlocking doors for our customers – A big day in the adverse mortgage broker world
Tuesday two weeks ago was a huge day, not just for Simply Adverse, but for our clients and our lending partners. We produced 7 Bluestone mortgage offers, our biggest total for a single lender in one day.
The fact we were able to achieve this is a culmination of so many things but primarily it is the bespoke system we have built, our tried and tested infrastructure, our people and in this instance a great relationship with a truly collaborative mortgage lender inBluestone.
We manage the entire underwriting, communication and case management process ourselves, there is no requirement for any third party involvement. As a result, the experience within our team has become a powerful tool in the adverse mortgage space.
Behind the seven mortgage offers yesterday there are many reasons why the client ended up talking to us, but the theme is very similar…
- A local recommended broker that couldn’t help
- A broker that didn’t bother to call back
- Brokers that said our clients had no chance of getting a mortgage (fortunately these clients didn’t give up and found us)
- Brokers that tried several lenders and had no success with their scatter gun non-scientific approach
Whilst we are not perfect, we have worked hard on a communicative relationship with our lenders and customers that ensures we accept mistakes and more importantly learn from them. We communicate frequently on all cases and seek to understand issues, never making assumptions. We work together to synchronise systems and give the customer a voice regarding their previous credit issues.
We have a team that fully understands their part in the process and know exactly what Bluestone require. Simply Adverse is supported by a motivated and capable Bluestone Business Development Manager who cares and delivers in Simon Wilson.
This is not a one off. We have a customer who came to us having been turned down for a mortgage with a high street lender, their mortgage has completed in under two weeks.
We will set further new records and we aim to do this with every specialist mortgage lender in the market. To follow our progress, keep up to date with this story as its updated (originally published)here.
Talk to us today if you need support and help with any type of bad credit mortgages
Should I get a second mortgage or remortgage as a company director?
Bad credit or limited business accounts history is often something that impacts entrepreneurs or company directors. This means there is often a debate about whether mortgage brokers should ‘advise’ clients who want to raise additional funding to remortgage or to look instead for a second charge solution
In reality, until a broker has spoken to a client to assess their individual circumstances, it’s impossible to say which is the most appropriate product. Most people are familiar with the idea of remortgaging, that is switching your existing mortgage to a new deal with either your current or another lender. However, many of us are less sure of what a second charge mortgage is.
Here we will give you a quick introduction to second charge mortgages, and an overview of the circumstances that might make this product more suitable for you.
What Is A Second Charge Mortgage?
With a second charge mortgage, often just called a second mortgage, rather than switching your deal you retain your existing mortgage. You then take out a second loan secured against the value of your home. This second charge is often a good alternative to an unsecured loan particularly if you have a poor credit history.
Choose Your Broker Carefully
A problem with making an informed decision about which is best for you, is that many brokers don’t have the ability, access and/or experience to assess both first (remortgaging) and second charge options.
This means they are most likely you to steer you down the route that they are most comfortable with. That may not be in your best interests.
In addition, broker costs may vary between remortgaging and second charge products. At Simply Adverse, not only are we experienced in both types of products, but our broker fee will be consistent whatever decision you make.
There are a number of reasons why you might to choose to go down the remortgage route. These include:
- Remortgaging to get a better interest rate, for example because you can take advantage of an introductory offer.
- Gaining more flexibility by accessing a deal that allows you to make overpayments.
- Some people consider remortgaging in order to consolidate debt, although this will require formal advice, as turning unsecured debt into a is a big consideration.
- Some clients like the simplicity of one monthly mortgage payment
Before remortgaging though it’s worth bearing some things in mind. Firstly, you should check that you won’t incur any penalty charges if you settle your current mortgage early. These will often show on your paperwork as an Early Redemption Charge or an ERC. In addition, if you are happy with your current deal, for example you have a particularly low interest rate, you may be better retaining this and considering looking at a second charge mortgage.
Why Consider A 2nd Charge Mortgage?
Again, there are a variety of reasons why a second charge mortgage would be a good choice in particular circumstances.
Often a 2nd charge mortgage is useful where your credit history has worsened, or you have had some form of adverse credit since your last mortgage. Key examples of this are raising additional mortgage funds when:
- You have an interest only mortgage currently and keeping your monthly mortgage cost low is of primary concern.
- You have competitive high street mortgage terms currently, but recent adverse credit means your rate is likely to be higher if you change mortgage now
- Flexible income sources need to be considered for the new loan
- You have very recent adverse credit and the speed of raising capital is critical
As we’ve already mentioned, a second charge mortgage might be the most appropriate choice for you if you have recorded adverse credit since you got your existing mortgage. However, either option could be available for you regardless of your credit history depending on your circumstances (read more about2nd mortgages with bad credit).
As we always stress at Simply Adverse, these decisions depend entirely on an individual’s particular circumstances. As adverse credit specialists, we understand how important it is to look closely at why you recorded adverse credit in the first place, before making any decisions on future financial products.
Talk To Us Today
Simply Adverse brokers are experts in finding the most appropriate mortgage products for clients with poor credit histories. We won’t recommend a product that is not right for you.
If you’re not sure whether remortgaging or a second charge mortgage is the best choice for you, we will consider all your options before recommending a route to go down. Many brokers can’t offer this breadth of experience.
We won’t rule anything out, or anything in, until we’ve spoken to you, and looked at your financial circumstances and credit history. As we said at the start, until a client’s individual circumstances have been assessed, it’s impossible to know what is best.
So, contact us now at Simply Adverse or call us on 01245 330161
Note, this article was first publsihed on Simply Advese: https://www.simplyadverse.co.uk/remortgage-vs-second-charge-mortgage