Four in 10 first-time buyers have given up being self-employed to get a mortgage as analysis reveals they are twice as likely to be rejected by their bank than experienced buyers.
However, brokers say with the correct guidance through the complexities of lender criteria, they need not give up on the dream of self-employment.
According to Aldermore’s First-Time Buyer Index, 39% of self-employed first-time buyers are turned down for a mortgage compared to the national average of 20%.
Furthermore, nearly one in five prospective buyers who have been rejected for a mortgage were declined due to being self-employed, having irregular income or being a contract worker.
Education for first-time buyers is key
Billy Roberts, director of Connely Roberts Mortgage Services, said the analysis reflected the conversations he has had with first-time buyers in his brokerage.
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“We will often be asked by first-time buyers if is just easier to go and get a permanent role but a lot of the time we’re able to assist them so they don’t need to give it up,” he said.
“It is all about educating them in the right way and liaising with the right lenders to ensure the outcome is a positive one.”
Roberts said he finds that first-time buyers assume they need a minimum of three years’ accounts to get a mortgage and so wait longer than necessary to start searching for one.
“Some first-time buyers will speak with their bank directly. Often the high-street lenders will require more years of accounts and will usually take an average of the income over a period of time.
“By the time they come to us as a specialist broker, they have little confidence of being able to take their first step onto the property ladder.”
Limited company profits
A common misconception, says Roberts, is that first-time buyers must use their taxable drawings from their business as income for the lender’s affordability assessment. However, those who trade through a limited company can consider their profits – an option overlooked by business owners who have never had a mortgage before.
“We’ll often be asked by first-time buyers if they should start paying themselves more to get the mortgage they need,” added Roberts. “But this won’t always solve the problem as some lenders will still look at average earnings over a number of years.
“This is where we see success using the profits for the limited company as opposed to taxable drawings out of the business.”
Chris Sykes, technical director of Private Finance, says the way lenders assess self-employed income varies widely from one bank to another. Going direct to just one lender increases the chance of rejection if the lender’s way of assessing income does not suit your circumstances.
“Each lender’s self-employed criteria is different,” he said. “Some base it on the latest year’s income while others will use the last two to three years, for example.
“Some lenders, if you are a limited company, will use salary and dividends or salary and share of net profits or a share of gross profits. It is a minefield and is incredibly hard to navigate without a broker.”
