As anybody who has tried it will know, being your own boss isn’t always easy. In the early days, you may have to do just about everything yourself. This can really limit your personal life. Even once your business matures, you still have to deal with unique challenges. In particular, you have to face up to the fact that lenders may be very wary of dealing with you.
Business owners versus mortgage lenders
According to a survey from specialist mortgage broker Haysto, approximately one in six people reported having their mortgage application rejected because they were their own boss. More specifically 14% of company directors and 15% of sole traders reported being turned down for a mortgage due to their employment status.
Looking at this from a “glass-half-full” perspective, however, five in six people are having mortgage applications accepted even though they are their own boss. This clearly shows that it is possible.
Understanding mortgage lenders
The key point to remember is that mortgage lenders now have to act in accordance with the terms of the Mortgage Market Review. In simple terms, this means that they cannot just look at multiples of income. They must look at the applicant’s personal circumstances and assess their ability to afford the loan over the long term.
Keep in mind that lenders can be sanctioned if they are found to have made an improper loan. The safest approach for them, therefore, is to err on the side of caution. Then add in the fact that lenders have to think about their own finances. Nobody will be happy if a bank winds up in the sort of trouble the world saw in 2008.
In short, therefore, if anyone wants to get a mortgage, they’re going to need to make sure that they satisfy a lender on all counts. This can be a particular challenge for the self-employed. That said, the challenge is not unique to them. Zero-hours contract workers and those on variable incomes are both in much the same situation. Here are some tips on how to address it.
Look after your credit records
Make periodic checks with the credit bureaux to ensure that your credit record is up-to-date and accurate. Keep it healthy by always making the minimum payments in full and on time. Pay extra if you can.
Reducing the balance on loans lowers your debt-to-income ratio. Reducing your balance on lines of credit (e.g. credit cards) doesn’t have quite the same effect. This is because you still have access to the credit. That said, staying comfortably below your credit limit is an indicator that you can manage your money.
Build up your deposit
Deposits protect your lender from house-price falls and from borrower defaults. Given that COVID19 and Brexit are both still running their course, it’s understandable that lenders will probably be particularly wary of these possibilities.
It can be hard to build up a deposit, especially when you’re renting. It may, however, be possible for you to get some help with it. For example, the Lifetime ISA is designed to help either with the purchase of your first property or in your retirement. It benefits from government bonuses.
Choose your lender with care
Lenders may all work to the same basic set of rules, but they still have some scope for individual decision-making. They may also have varying degrees of understanding about the realities of being self-employed.
Going to a mortgage broker may be a convenient way of getting guidance on which lenders are most likely to give you a yes. If you don’t want to go down this route, then at least do your research carefully. Check which lenders have the best track record of dealing with people in your situation.
Your property may be repossessed if you do not keep up repayments on your mortgage.