In recent years, the number of people who are self-employed has increased by over 40% from 3.3 million in 2001 to 4.9 million in 2019 which is increasing year on year. To put this into perspective, that means that the number of self-employed people accounts for 15% of the working population in the UK. That’s a lot of self-employed mortgages!
At Cheshire Money we can help, whether you’re a copywriter, journalist, author, illustrator, marketer, web-developer plus many, many other freelancing professions. However, it’s not a straight forward process. Unfortunately, when it comes to getting a mortgage as a freelancer, this is rather more difficult as you’re not treated in the same way as an employed person who may be earning similar. Lenders treat the freelancer quite differently.
The Challenges of the Freelancer
So, even in this day and age of the self-employed freelancer, it seems the high street isn’t very well equipped to deal with freelancer mortgages. Unfortunately, if you approach a ‘normal’ high street bank or building society, you’ll probably find that the mortgage advisor is perfectly adept at reading the standard payslip and interpreting it, but doesn’t have the same skill set to be able to understand the sometimes complex world of a freelancer’s accounts. Which immediately puts the freelancer at a great disadvantage.
The problem being, that the banks/building societies will simply focus on whether or not the freelancer is able to sustain a steady stream of work in order to provide an income. This also means that the process will take longer and will be rather more challenging versus the norm.
To be clear, there isn’t actually such a thing as a freelancer mortgage. Every person has access to the same deals – potentially. The questionable part is being accepted for one. As a freelancer, you’ll no doubt have a variable income which means that a fixed rate mortgage is preferable. What’s also useful, as a freelancer, is the ability to be able to over or under pay, or even take a payment holiday depending on your income at that time.
Alternatively, an offset mortgage would work well for a freelancer. This is when the mortgage is linked to your savings, assuming they are held with the same lender. So for example, if your mortgage is for £150,000 and you have savings of £10,000, then the mortgage interest is paid on £140,000 rather than the full £150,000 as your savings will be taken into consideration. Another thing to consider is that generally speaking, freelancers will put money aside for tax purposes, so can benefit from that too.
As a freelancer, how do I prove my income?
An employed person would provide payslips. A freelancer must provide business accounts. Where this differs is that an employed person will be asked to provide 3 months’ worth of payslips and are usually sufficient, a freelancer may need to provide three years’ worth of accounts. Normally prepared by a chartered accountant too.
Another downside is that whilst your income may well demonstrate an upward spiral in year two or three, the lender won’t use that figure, but will work out an average. Plus, if you take a break for instance, so year two may demonstrate a gap in earnings, then again, the lender may well use the lower figure to work out borrowings, which isn’t ideal.
Is it possible to work out how much I can borrow?
It’s not no, unfortunately. As a freelancer, your work commitments can be up and down, thus no assumptions can be made that whatever your earned in year one will be the same as year two. So it’s not as simple as taking the annual figure and multiplying it. Lenders (as with all types of mortgage) will carry out an assessment of affordability. This will be calculated by looking at your expenditure versus your income and thus resulting in a figure which they think you can afford to pay. Also, if you have a bad credit rating, this will impact on your potential borrowings too and may well result in lesser borrowings being available to you. On the upside, if you have a large deposit you can put down, that always helps.