National Freelancers Day is on 16th June 2022 and is a celebration of all things freelance, and an opportunity for self-employed people across the country to look to the year ahead.
If you’re a freelancer, looking into the proverbial crystal ball may not be a welcome prospect if you need a mortgage. You may already be worried about rising interest rates and house prices, let alone the potential complexities of persuading a mortgage company to lend to you.
Fear not! Mortgage lenders are getting pretty used to lending to freelancers as this style of working continues to grow.
In fact, there are plenty of mortgage products for freelancers out there but you should start by researching ‘self employed mortgages’ rather than ‘mortgages for freelancers’. That’s because, while freelancers may operate under different business structures, such as being a sole trader or a limited company, mortgage lenders tend to group everyone together under a ‘self employed’ banner.
Some providers offer specific self employed mortgages, while others offer freelancers access to standard mortgage products, as long as they meet certain criteria. So if you don’t see any ‘freelance’ mortgage products it doesn’t necessarily mean the provider won’t lend to you.
Don’t get too bogged down in worrying whether your business structure will be suitable for a specific lender as most are adept at understanding the different ways freelancers are paid – just make sure your finances are organised, comprehensive and up to date.
As mortgage lenders, we’re not trying to catch people out – we really do want to help people buy their dream home. Whether an applicant is a freelancer or not, it’s all about looking for positive supporting evidence.
Employed people use their pay slips not just as proof of earnings but also to reassure the lender that they are in stable employment. Obviously, this isn’t feasible for you as a freelancer, so you will need to look at other ways to evidence work history and current employment status. For most freelancers, this will mean providing evidence of contracts, company accounts or self assessment tax forms (SA302s).
Ensure your work and contracting history is in order and any online profiles, such as LinkedIn, are up to date and representative of your current work.
Freelancers are not exempt from all the usual checks that lenders undertake for other applicants either, so it’s well worth scrutinising your credit report to make sure it’s clean and up to date i.e. all addresses are accurate, credit repayments are correct and up to date, no County Court Judgements are present, etc. Similarly, make sure all expenditure is declared and bank statements can be accounted for.
It’s true to say that not every bank or building society will lend to freelancers. It may be worth approaching some of the smaller, specialist lenders who often take a more personal approach to the underwriting process and review each application individually.
Finally, having a mortgage broker on hand to guide you through the process could also be helpful. They’ll know which lenders are most likely to accept your application and how to package your application to get the best result. Not only that, but they may be able to get you a better deal than you could access yourself, and could save you time as they will get the application and supporting documents right first time and communicate effectively with the lender – after all, they do this every day!
We’ve compiled a list of handy tips that cover a range of helpful points for any freelancers who might need a mortgage in the near future.
In the meantime, may we wish you a happy and very productive National Freelancers Day!
Considerations for all freelancers:
- Many people, but especially freelancers, gravitate to their bank to obtain a mortgage in the belief that their bank will understand their finances and will be more likely to lend. This is not necessarily the case, especially for freelancers whose finances may be more complex than an average mortgage applicant’s. Finding a specialist mortgage lender who can understand your business gives a much higher chance of a successful application.
- Lenders will understand that different industries make payments in different ways i.e. a videographer may be paid at the end of a project, whereas a marketing consultant may invoice once a month. As long as the freelancer is being paid in what is considered a ‘normal’ way for that industry, lenders tend to take a favourable view.
- There is generally no minimum age for freelancers to apply for a residential mortgage, whereas buy to let mortgages often have a minimum age of 21, 25, or even 30. If someone has a proven history and deposit, their age should not hold their application back.
- Similarly, there is no legal maximum age limit for freelancers to apply for a mortgage, but lenders will set their own criteria.
- If freelancing is a side hustle (as opposed to an individual’s main source of income) most lenders’ standard position is to use 50% of their freelancing work in affordability calculations and the individual should be prepared to provide tax returns as evidence that this income is sustainable.
For freelancers running a limited company:
- Two years of company accounts are usually required for freelancers running their own business – some lenders may consider less.
- Make sure company accounts are filed on time – late filing could ring alarm bells with the lender.
- Different lenders will have different affordability criteria and may base their mortgage offer on salary and dividend, net profit or retained profit. It is worth speaking to an accountant to properly understand the relevant figures before applying for a mortgage.
- If a freelancer has switched their business model from sole trader to limited company but doesn’t have two years’ worth of accounts, the lender may take a favourable view if the individual is in a similar industry or sector.
- Some lenders will take the average of two years’ accounts, others will base their lending decision on the worst year – whether that be year one or two. Freelancers who have had a particularly poor year (such as due to the impact of the Covid pandemic) but can explain why, will still be considered for a mortgage.
- Freelancers who are concerned about having a poor year before applying for a mortgage can ask their accountant for an estimated projections letter to support their case.
For freelancers operating as a sole trader:
- Two years of operating as a sole trader is usually the minimum required to apply for a mortgage. Some lenders will prefer more and some will accept less but two years is a good rule of thumb.
- Keep all paperwork related to freelance work – from contracts, to bank statements, invoices and remittance notes as a lender may ask to see it.
- It can be helpful, but not always essential, to have a separate bank account to keep track of business expenses and income away from personal finances. If not, be ready and able to clearly demonstrate the difference in personal and business funds.
- Lenders may use a day rate calculation such as five times the value of daily contracts, multiplied by 46 or 48 weeks (to allow for some downtime/holiday etc). The S302 form will be used as a way to calculate previous earnings based on submission to HMRC so this needs to be available.
- If the applicant’s freelance work is in the same sector as their previous employed job, then an application can sometimes be supported by evidence of PAYE income in the form of P60 forms.
For freelancers operating under an umbrella company:
- There are mortgage providers who will lend to freelancers who use an umbrella company but it is usually best to engage the services of a specialist mortgage broker for advice on this front as the application can be more complex. Much of the guidance above still applies in terms of demonstrating clarity of earnings and stability of contracts.