Can I Get a Mortgage as a Freelancer?
If you work as a freelancer, you will probably have to cross the tricky bridge of getting a mortgage at some point.
Of all occupation types, working on a freelance basis can be the most difficult to get a mortgage.
You may be wondering about how to show evidence of your income, or whether the evidence you have is acceptable.
You will also know your income can go through peaks and troughs, making it hard to predict what you may earn in the future.
The good news is you can get a mortgage as a freelancer.
This guide goes into great detail about everything you will need to get a mortgage if you’re self-employed or working on a freelance basis.
Let’s jump in.
- How to Get a Freelancer Mortgage?
- How Long Should I Work as a Freelancer Before Applying for a Mortgage?
- How do Lenders Assess Freelancers?
- Why Do Freelancers Typically Struggle Getting a Mortgage?
- Getting a Mortgage as a Freelancer When Self-Employed
- Getting a Mortgage as a Freelancer on a Fixed Term Contract
- Ways to Borrow as a Freelancer
How to Get a Freelancer Mortgage?
If you’re a freelancer, you can fall into many different categories when it comes to your income.
- You might operate as a sole trader
- You might work on a retainer basis
- You could work on a fixed term contract/s
- You might be a director of a LTD. Company
- You might be a partner in an LLP
Because being a freelancer is such a diverse category, what you will need to do to get a mortgage will vary depending on which aspect you fall under.
Tax Calculation & Tax Year Overview Evidence
If you’re a sole trader, a director of a LTD company, on a retainer or a partner in an LLP you will likely need to provide your Tax Calculations & Tax Year Overviews to lenders.
Your Tax Calculations & Tax Year Overviews is essentially a complete tax overview you receive each year when you submit your income tax return.
It shows the income you’ve declared as well as the tax you have paid on that income.
By providing your Tax Calculations & Tax Year Overviews, a lender has documented evidence of how much money you make in a tax year.
In rarer cases, a lender may only ask for your latest year’s earnings and only request the Tax Calculations & Tax Year Overviews from your latest tax year.
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Contractors can be paid (and pay their taxes) in many ways.
Sometimes they will submit their tax returns and receive the above mentioned Tax Calculations & Tax Year Overviews document.
However, some contractors have quite complicated tax submissions sometimes the tax is taken in a similar way to PAYE by the employer and in rare cases, contractors use umbrella companies for purposes of taxation.
Lenders will normally request additional information from contractors, and it is not uncommon for them to ask for the actual contract as well as any tax filings when a contractor makes an application.
It is important to remember that as long as you have all your personal documentation in order, you shouldn’t have a problem getting the mortgage you just might need to provide extra evidence compared to other borrowers.
If you’re a director of a limited company with a significant shareholding, there are lenders that will take your company accounts as evidence instead of Tax Calculations & Tax Year Overviews.
This can be incredibly helpful for directors who leave their funds in the company rather than take salary and dividends.
The lenders that assess company accounts will look at your shareholding and the balances the company holds and then evaluate how much you could draw down if you needed to as income.
As far as certain lenders are concerned, that money is there for you to take if you need funds, you have just not exercised your option to take it.
How Long Should I Work as a Freelancer Before Applying for a Mortgage?
You will need to have been trading as a freelancer long enough to have at least one years earnings filed for tax purposes to get a mortgage.
This is because without the official documentation from HMRC, lenders won’t consider an application.
In years gone by, you could self-report earnings to a lender and they would ask for a signed declaration and then lend on the basis of that declaration.
This caused many problems as some self-employed people took advantage of the lenient reporting standard and over-declared their income to borrow more money.
Borrowing more money than they might reasonably be able to pay back created a wave of defaults.
When the financial collapse happened in 2008, lenders decided that self-reporting was leading to too many unaffordable mortgages, and they changed their approach to lending at that point.
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Does the Number of Years Trading Matter?
As discussed, you will need at least one year of trading under your belt.
But for many lenders this isn’t sufficient and they will want to look across multiple years.
Typically, lenders across the market will want two or more years’ worth of tax returns.
If income varies greatly between tax years a lender may ask to go back further and look at more tax returns.
Essentially, they are trying to gauge what earnings you can expect in a ‘typical’ year.
You should also be aware that if your income does vary year on year, a lender will likely ask why this is and if there is a specific problem or market consideration that causes the fluctuation.
For example, farmers tend to be self-employed and rely on futures (prices for their crops in the future) to establish income from any given year.
These futures change according to demand, so a farmer might find himself with a lucrative crop one year, and an unprofitable crop the next.
How do Lenders Assess Freelancers?
A lender may also ask you additional questions about the nature of your self-employment.
A lender will typically want to know:
- Is your income likely to increase or decrease in the future (if yes, why?)
- Have you changed your job role within your self-employment? (Such as switching from one specialty to another)
- How long have you been self-employed?
These questions help a lender ascertain how stable your self-employment is.
Someone who has been working as a self-employed carpenter for 20 years is going to be considered less risk than someone who started trading a year ago.
Likewise anticipated dips in earnings are going to be a risk factor and if you have changed roles.
Changing roles is not uncommon in the self-employed sector, but lenders can be cautious about this, especially if they feel like you don’t have stability in your income as a result of a role switch.
Why Do Freelancers Typically Struggle Getting a Mortgage?
The biggest problem freelancers face when getting a mortgage is demonstrating their income.
But other aspects can create barriers to getting a mortgage too.
If you’re newly self-employed or you have recently changed your role within your self-employment, a lender will either decline an application or want a lot more information.
You MUST have at least one year’s trading with a tax return filed to be eligible for a mortgage.
If you have changed roles within the last year, a lender may well decline the application.
They might ask whether you have traded at least a year in your new role to get an idea of your income.
Most lenders will want more than one year’s trading and ask for a minimum of two years.
To understand what you need to do in regard to getting a mortgage you should discuss your situation with a mortgage broker who will give you advice about what you need to do in order to obtain a mortgage.
Income instability is fairly common across the freelance sector.
You can have good years and bad years, it is the nature of being self-employed.
Employed people typically have a fixed earning each year, whereas self-employed people can earn as much as they can book in workwise.
If the work isn’t there or slows down then this can impact earnings significantly.
If your income varies wildly, a lender may be concerned about how you can afford to pay a mortgage and will likely enquire why your earnings aren’t very consistent.
Documentation and Evidence of Income
When the COVID-19 pandemic hit and the UK government introduced income support across the country, the chancellor made an unsurprising statement essentially, he said there was a clear disparity in the amount of tax paid by self-employed people and employed people.
This is for a couple of reasons:
- Self-employed people report their own income
- Self-employed people can deduct expenses from their taxes
Because self-reporting is almost universal across self-employment there are a minority of people who file their return to minimize their tax liability.
Self-employed people can do this legitimately by claiming the expenses they have incurred or, they can simply declare less income than they received.
The latter is a bad idea for two reasons.
Firstly, HMRC isn’t naive enough to take everyone at face value and self-employed people are audited if a tax return doesn’t seem right.
Secondly, it hurts your affordability on a mortgage.
Lenders typically look at your gross income (before expenses and tax) to calculate affordability.
If you’re artificially lowering your gross income for tax purposes, you will automatically be reducing the amount a lender can consider on an affordability calculation.
Getting a Mortgage as a Freelancer When Self-Employed
To summarise the information we have outlined in this article these sections succinctly address key points.
If you’re self-employed, you will need to provide the lender with your Tax Calculations & Tax Year Overviews.
They will then do the affordability calculation based (typically) on your gross income.
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Getting a Mortgage as a Freelancer on a Fixed Term Contract
If you’re a freelancer that works on a contractor basis, you will likely need to provide the contract to the lender.
If it is a fixed-term contract that has an expiration date a lender will likely ask what you intend to do beyond that date.
This is especially common if the fixed-term contract is expiring sooner rather than later.
Alongside your contract, you will need to provide evidence of income through tax documentation.
Contractor tax information can be difficult to sift through and if you’re having problems providing evidence to a lender it is a great idea to discuss this with an accountant.
An accountant may be able to help in one of two ways:
- Collate the relevant information and official documentation in the way the lender has requested.
- In some cases, they will be able to sign off on your income to a lender if documentation is too difficult to produce (accountant’s certificate).
Ways to Borrow as a Freelancer
As a freelancer, you have no restriction on the products available to you on the market compared to an employed person.
In theory, any product an employed person can get, you should also be able to access.
Issues can arise with the documentation and evidence you need to acquire those same products.
There are many more hoops to jump through as a freelancer compared to an employed person in the mortgage process.
Sole traders will need to provide Tax Calculations & Tax Year Overviews. Commonly a lender will request two or more years’ worth of those tax documents.
There are however lenders that will consider your latest year if you have only one year’s trading accounts or if your income for the latest year is sufficient for the mortgage application.
Company directors can go down one of two paths with a mortgage and different lenders evaluate company directors in varying ways.
You can provide your Tax Calculations & Tax Year Overviews in the same way as a sole trader or with some lenders using your company accounts.
In rarer cases, lenders may request both personal Tax Calculations & Tax Year Overviews and company accounts to get a good financial overview.
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Employed workers will either have a contract and file taxes like a contractor or they will be on payroll from their company.
If you’re on a company’s payroll you will need to provide your payslips to a lender. Normally lenders ask for the last three months, but in more unusual cases may request additional payslips to evidence your income.
However, remember that if you are technically employed by your company but you own more than 25% of the company’s shares, you will be treated as self-employed by the lender.
This means that you would need to provide Tax Calculations & Tax Year Overviews in that instance and payslips will largely be ignored.
If you’re on a contracting basis see the section below.
Contractors often prove the trickiest type of applicant for mortgages.
The way a contractor pays taxes can be convoluted to say the least.
As with all other mortgage applications, a lender will want concrete evidence of your income.
This might be through Tax Calculations & Tax Year Overviews, LTD company accounts or even payslips.
It may even be a combination of more than one of these.
Lastly, contractors will be asked to provide details of their contracts in most cases.
Getting a self-employed mortgage isn’t necessarily easy, but in most cases, there are many options available that you might not think are accessible because of your employment status.
Boon Brokers is a whole of market mortgage, insurance and equity release broker.
Boon Brokers offers fee-free, no-obligation advice.
Get in contact with Boon Brokers to discuss your self-employment and get tailored mortgage advice today.