Joint Mortgage Self-Employed
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Joint Mortgage Self-Employed
All about self-employed joint mortgages, with Richard Campo.
Can you get a joint mortgage if one applicant is self-employed?
Yes, of course. It gets a bit more complicated at this level and there are a couple of things to highlight. Lenders have a couple of different suites of lending criteria and when you mesh two bits of criteria it can get complicated.
So, for example, some banks are great at dealing with employed clients, some are great at dealing with self-employed clients but not many are great at both. And that’s why it gets tricky.
When you’re self-employed, banks focus on the length of time trading, with a minimum of one year. You have to have a published set of accounts behind you before you can even entertain getting a mortgage. Most banks want two years plus. Once you’ve got three years you’ve got the whole market available.
That’s really important – if you’ve only been trading since this year, keep plugging on and we’ll deal with you in a year’s time. Then the really complicated bit is the treatment of your income. Banks look at some of the following bits of your income – your salary, your dividend, your net profits or your ‘profit on ordinary activities before tax’.
That’s a real mouthful, but it’s a great one, because a lot of self-employed people don’t draw out all the income from their businesses. That inhibits them when they come to get a mortgage and that line in your accounts, the profit on ordinary activities before tax, gets around that. It’s a way of tapping into retained profits.
Then we’ve got to mesh all that with your partner. If you’re looking to borrow a very modest sum, none of this might be relevant. Where it gets complicated is where you’re maxing out your lending – you want to know how much you can borrow. If one bank looks at net profit but you’re drawing out big dividends, that’s not going to help you. We’ll spend some time to make sure you get the outcome that you’re after.
What criteria need to be met if one applicant is self-employed?
I’ve covered the high level criteria off, but another thing to be aware of is the documents used to assess your borrowing. If you’re a limited company, we probably want to see accounts. If you’re a contractor, we probably want to see your day rate: even if you’re a company director, most banks are more interested in your contract.
As brokers what we really like is a form called your SA302, which is confirmation back from HMRC that they agree with your tax. Some people confuse that with the SA100 – the form you or your accountant uses to file your tax returns. Some banks want to see both those documents. Clients ask why, as they’re both the same – and that’s what they’re checking.
If there’s a discrepancy between what you think you earn versus what you’re paying tax on, lenders get a bit jittery. Once we have your SA302 we do some research about what banks are best. We’ll want a chat with your accountant because if there’s a story to be told, it’s good for us to understand the business inherently.
With contractors, if it’s preferable to look at the limited company accounts we’ll do that, if it’s preferable to work on your day rate, we’ll take that approach. Typically the day rate is easier and cleaner because the whole game when you’re self-employed is minimising your tax. So you might not draw out all the income or take a modest salary – which is fine.
A lot of banks would take your day rate and multiply that by five (if you’re working five days a week) and then again by 46 weeks in a year – to allow for holidays and gaps between contracts. Some banks are a bit more generous than others.
Finally comes the classic high net worth exemption. So if you have over £3 million worth of assets or your income is over £300,000 a year, disregard everything I’ve just said. We’ll probably talk to a private bank to put a proposition together where they look at you based on risk.
If you run a big business turning over millions and millions of pounds a year, the accounts aren’t always clear. Sometimes it’s even different jurisdictions – that’s where we can get more involved. Lender selection is really key – we need to go to a bank that understands what you’re doing.
How much can we borrow if one applicant is self-employed? What deposit would we need?
This bit’s simple because it’s the same for everyone. Every bank will offer about four and a half times your income but the caveat is on how that is assessed. Some banks will go as high as six times your income.
And most high street banks will offer you between five and 5.5 times your income. If you earn £75,000 to £100,000 or more we can usually get a bigger multiple. On the deposit, the minimum is 5% and once you offer a 40% or more deposit you get the lowest pricing. Every additional 5% on your deposit up to 40% means the interest rate you’ll be on will be lower – because you’re less risk to a bank.
Those rules are the same for everyone. It’s just the assessments that you need to be careful of.
Does a mortgage have to be in joint names?
You don’t have to have a mortgage in joint names. There’s a bit of a misconception that if your partner doesn’t work it has a negative connotation to have them on the mortgage. It doesn’t actually make any difference, just to be clear.
Some people want to run their finances separately and I completely respect that. It doesn’t have to be a joint mortgage, but it’s preferable because more lenders offer that. With some banks, if you’re married or living together in the property, your partner has what’s called an equitable right to the property. That’s a key definition and the lender will want them on the mortgage.
To explain what that is, let’s say you’re the lead owner: you live in the property and you pay the mortgage. If you were to lose your job and default on the mortgage, a bank can’t as easily evict your partner if they’re not named on the mortgage. So, to be blunt, that’s why more banks prefer joint mortgages. But if you don’t want to do that, we can do a solo application.
Or, you can do something called Joint Borrower Sole Proprietor mortgage where you’re both named on the mortgage and one of you is not on the property deeds. We could also organise that the other way around if needed. So if that’s a pressing issue for you, no problem, talk to us.
Is there anything else we need to know on joint mortgages for the self-employed?
I’ve barely touched the edges, to be honest with you. It is really complicated, and that’s why I didn’t get into all the details. The main point I want to press home is that this is all about the assessment of your income.
You can have two banks that will look at the same set of accounts and offer an amount that is literally 50% to 60% more or less than the other. It’s so important to pick the right lender. You don’t want to get loads of stuff together and have weeks of time wasted just for a bank to say no at the end, for something we could have figured out at the beginning.
If you’re self-employed, it’s so time-consuming – you don’t need another thing to do that’s really hard work. Let us do the heavy lifting and make your life easier. As a broker we get exclusive rates, which can mean better deals than going to a bank directly. That might sound odd, but brokers do well over 85% of all lending now, and banks are moving away from giving advice.
Two major banks have recently announced they are shutting down most of their branch network. They want to do everything online and move to more of a wholesale approach in how they offer products.
So the mortgage market will go the way the IFA market did – if you get a pension now, you don’t get it on the high street. You talk to an IFA. Now if you want a mortgage, you don’t go down the high street. You talk to a broker, we work from a comprehensive panel which is representative of the whole of the market.
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