I'm self-employed, my wife is expecting our second child and we need to move, but I’m worried we won't get a mortgage
I have worked in financial services for 10 years but left my job just over two years ago to start my own business.
I work on a project basis for financial services clients, offering consultancy services.
At first it was just me so I didn’t bother filing accounts, I just did my tax returns. Now I have two part-time employees who help out and I filed my first set of accounts this year.
My wife doesn’t work and is expecting our second child and we really need to move into a larger home but I’m worried about getting a mortgage – what are my options?
Lenders will take your increased expenditure into account when assessing you for a loan
Sarah Davidson, of This is Money, replies: The rise in self-employment since the financial crisis has been credited to a number of factors, but one part of this is the number of people choosing to set up on their own as contractors or consultants.
Many were previously employed and now work in a similar field but offer their services through their own company. This brings with it extra flexibility, variety and for some the potential for higher earnings and to grow their own business.
However, it also makes it harder to get a mortgage than being employed. This is particularly the case for those who are the main or sole earner, and so don't have a partner's employment to support a mortgage application.
It is still possible to get a mortgage, but you need to speak to someone who can give you specialist advice and tell you which lenders are likely to consider your situation. We spoke to a mortgage broker, who explains more.
Darren Pescod, of The Mortgage Broker, replies: The mortgage market has moved on from the old 'self-certification' mortgages, and thousands of self-employed people in the UK all thought that was the end of obtaining a mortgage.
However, this is not true so let me explain the avenues available to you so you can buy that dream house.
Most people assume that you need three years’ worth of trading accounts to get a mortgage – only a few lenders now have this approach to their lending criteria in today’s market.
There are lenders out there who will lend to you based on just one year trading and one year’s accounts, so all is not lost.
There are also lenders who will lend to you based on two years' tax returns and they won’t ask for your accounts, so there is a potentially better deal to be had by approaching this type of lender.
An experienced mortgage broker will understand and monitor each lender's appetite to lend and will be able to look at all of these options to see which deal offers you the best value whilst at the same time meeting the lender's underwriting criteria.
Consider the timing of your move
If we take it back to basics, you could obtain a mortgage based on your current situation, however you would get a better mortgage deal if you had two years accounts behind you.
Timing your next purchase to reflect that is also something to consider as there are more lenders willing to lend with two years' accounts, as opposed to two years' tax returns.
You haven’t mentioned in your letter if you are a sole trader or a limited company, as this can also affect the lender we approach on your behalf. If you are trading via a limited company you have probably been advised to take a minimal PAYE salary and the rest of your annual package in the form of dividends.
I’ve lost count of the number of times I’ve been asked if dividends are taken into account. Yes they are, so if you draw a small salary this should not be a stumbling block for you.
The fact that you are expecting your second child needs to be taken into account and we would have to advise any lender of your future, presumably increased, expenditure.
The lender will look at the overall affordability to ensure you pass their ‘affordability calculations’ taking into account your PAYE, dividends and your future expenditure.
Is your wife planning to return to work after her maternity leave? If yes, this future income can also be factored in with some lenders which is great news as it allows us to increase the level of borrowing a lender will consider.
If you were one of our clients, the next step would be to send through your accounts and tax returns along with a budget planner and of course some personal detail.
This would allow us to run these figures through a selection of potential lenders' affordability calculators allowing us to get an idea of what level of borrowing could be available to you and your wife.
Mortgage Affordability Calculator
Find out how much you can afford to borrow with This is Money's mortgage affordability calculator, and see the difference between capital repayment and interest-only deals.