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Guide to self-employed mortgages

It can be more challenging to get a mortgage if you are self-employed, a freelancer, sole-trader, contractor, company director, or entrepreneur. If you are self-employed, your income might be considered less secure and less predictable. The security of your income can put lenders on the back foot because they want to know that you can make the long-term repayments of the mortgage they offer.

Good news – you can get a mortgage and Friends Capital can help you!

Before making a mortgage application, you should consider some careful planning, which will improve your chances of being approved. You will want to prove to a mortgage lender that you generate a regular income. Plan and speak to a financial adviser, a mortgage decline can damage your credit score.

What mortgages are available for the self-employed?

You may have heard about or previously had a self-certification mortgage, sometimes abbreviated to self-cert. For these mortgages, there was no need to provide evidence of how much you earn each year. However, these were banned in 2014 over fears that people were offered mortgages that could not afford.

Today, there are no mortgages designed for self-employed people. Instead, you have access to the same mortgages as everyone else. The lender will want to make more in-depth affordability checks, and they may offer you fewer mortgage options.

How to get a mortgage if you are self-employed

A mortgage lender will consider you as self-employed if you own 20% to 25% of a business or more, and this generates your primary income.

Before applying for a mortgage, you should prepare two years of certified accounts, and the most recent of these needs to be no more than 18-months old. It is a good idea to hire a qualified chartered accountant to prepare these for you, to ensure they meet lender requirements.

A qualified accountant will also help you understand your finances so that you can answer questions from the mortgage provider. If you do not know what a mortgage lender might ask, then mention this to your accountant, who will likely have experience in this.

Preparing supporting documentation should include requesting an SA302 form from HMRC. An SA302 form shows the income you have reported to HMRC and takes approximately two weeks to arrive. You should also prepare evidence to show retained profits or dividend payments and proof of upcoming contracts.

SA302 application: You can apply for your SA302 form from the HMRC here.

If you have been self-employed for one year or less, then it may be more challenging to get approved for a mortgage, but not impossible. In this case, it can help to provide proof of future commissions.

Further documentation that will help you get a self-employed mortgage include:

  • Driving license
  • Passport
  • Six months of bank statements
  • Council tax bill
  • Utility bills for the last three months

It would be best if you were prepared to answer questions on:

  • Car finance arrangements
  • Loan repayments
  • Store card and credit card repayments
  • The cost of your commute
  • Business-related travel costs
  • Childcare
  • Holidays

Tips for getting a mortgage if you are self-employed

Here we take a look at tips that will help you get a mortgage if you are self-employed.

Make your spouse the first name on the mortgage – This tactic can be beneficial, even if your spouse’s salary is less than the income you generate. Lenders are looking for a predictable and regular income, and this can be preferred over the amount of income earned.

Boost your income – You can opt to pay yourself a higher salary instead of keeping profits in the business. You can use this to boost your savings, and you can return to your regular salary arrangements after your mortgage gets approval.

Pay a more substantial deposit – You can reduce the monthly repayment from a mortgage lender by paying a larger deposit. With a lower regular repayment, your lending risks are reduced. You can also benefit from cheaper rates when your deposit exceeds 10 percent, 25 percent, and 40 percent of the property’s purchase price.

Check your credit rating – You can get your credit report for free and correct any errors that may appear. Mistakes can exist in your credit file, so you should not overlook this tip, even if you think you have not made credit-damaging mistakes in the past.

Postpone changes to your business – Mortgage lenders are looking at how predictable your salary is. Hence, it makes sense not to change the type of business you have or to switch from being a partnership to a limited company or sole trader.

Use a broker that is a self-employed mortgage specialist. A broker that specialises in and has experience in mortgages for self-employed people can be highly advantageous. A self-employed mortgage specialist can anticipate problems that you might incur and counter these before they become an issue. A specialist broker will also know the lenders who are most likely to lend to self-employed people.

Mortgage brokers that specialise in self-employed mortgages will know the different criteria that lenders favour. Some mortgage lenders prefer to see evidence of operating profit and retained profit. In contrast, other mortgage lenders prefer to see proof of salary and dividends. With access to this knowledge, you will increase the chance of being approved the first time.

Apply for a mortgage from a provider that is not a mainstream bank. When high-street banks refuse to lend to self-employed people, it is possible to turn to a specialist lender. Specialist lenders may lend to self-employed persons; however, a favourable mortgage decision may come at the cost of incurring a higher interest rate.

For more help and advice on applying for a self-employed mortgage, contact Friends Capital today.

Guide to Stamp Duty

You are required to pay Stamp Duty Land Tax (SDLT) when you purchase a residential home in England or Northern Ireland. Stamp Duty is payable on properties that you are buying for more than £125,000. 

Here we take a look at what is Stamp Duty, Stamp Duty for first-time buyers, Stamp Duty for second homes, joint ownership Stamp Duty, and when and how to pay Stamp Duty.

What is Stamp Duty?

Stamp Duty is a tax on residential property or a parcel of land costing more than £125,000. For second homes, the fee is payable from £40,000 or more. Stamp Duty applies to leasehold and freehold properties, purchased with or without a mortgage.

The amount of Stamp Duty payable is based on the purchase price of the property. You will pay a percentage for every group that your property price covers:

  • £0 – £125,000 0%
  • £125,000 – £250,000 2% 
  • £250,001 – £925,000 5%
  • £925,001 – £1.5M 10%
  • Over £1.5 million 12%

This means that if the purchase price of the property is £300,000, then your Stamp Duty fee will be 0% of the first £125,000 (£0), plus 2% on the next £125,000 (£2,500), plus 5% on the next £50,000 (£2,500).

In Wales, the equivalent to Stamp Duty is called Land Transaction Tax (LTT), and in Scotland, it is called Land and Buildings Transaction Tax (LBTT).

For Scotland, the Land and Buildings Transaction Tax is charged on properties over £125,000. The groups and percentages are as follows:

  • £0 – £145,000 0%
  • £145,001 – £250,000 2% 
  • £250,001 – £325,000 5%
  • £325,001 – £750,000 10%
  • Over £750,000 12%

For Wales, the Land Transaction Tax is charged on properties over £180,000. The groups and percentages are as follows:

  • £0 – £180,000 0%
  • £180,001 – £250,000 3.5% 
  • £250,001 – £400,000 5%
  • £400,001 – £750,000 7.5%
  • £750,001 – £1.5M 10%
  • Over £1.5 million 12%

Stamp Duty for first-time buyers

In England and Northern Ireland, if you are a first-time buyer, in the UK or abroad, then there is no Stamp Duty on properties worth up to £300,000. If you purchase your first home for up to £500,000, you will pay no stamp duty on the first £300,000, but you will pay Stamp Duty on the next £200,000.

There is no first-time buyer’s relief for homes over £500,000, and you will pay the standard Stamp Duty rates. However, homes bought under the Shared Ownership schemes of up to £500,000 receive first-time buyer tax rates.

Stamp Duty for second homes

A second home is an additional property to your primary residence. Second homes include buy-to-let properties and holiday lets. Stamp Duty is payable on property values of £40,000 or more. You will pay an additional 3% on top of the regular Stamp Duty rates.

Stamp Duty applies if you have purchased a new home, but you have not sold your old home, although you can ask for a refund if your old home is sold within three years of buying your new home. You must apply for a refund within three months of selling your old home or within twelve months of filing your SDLT tax return.

There are some exceptions to Stamp Duty on second homes, and these include houseboats, mobile homes, and caravans.

For Scotland, the Land and Building Transaction Tax on second homes incur an additional 4% fee on top of the standard rates. For Wales, the Land Transaction Tax on second homes incurs an additional 3% fee on top of the standard rates. 

Joint ownership Stamp Duty

For married couples, both parties need to be first-time buyers to enjoy the first-time buyer Stamp Duty tax reduction. Unmarried couples can claim for a reduction in Stamp Duty if one party is a first-time buyer, and only their name is on the mortgage deed.

However, how much a bank or building society will offer as a mortgage will be based solely on the income of the first-time buyer. This means that you may not be able to borrow enough money to get the home you desire. 

Secondly, if you split up, the non-first-time buyer may have no claim against the property and be left with nothing. This means that there are severe implications that married couples need to consider.

When and how to pay Stamp Duty

Within 14 days from the purchase completion date, you are required to create a Stamp Duty Land Tax return and to pay the tax. Penalties and interest from HMRC can be incurred if you do not submit your tax return and pay your Stamp Duty.

You can pay Stamp Duty yourself, but typically your solicitor or conveyancer will take care of this for you. It is your responsibility to make sure it is paid within the time constraints. If you decide to complete this step, then HMRC accepts Stamp Duty payments over the telephone, online, at the post office, a bank, or building society.

You should be aware that for homes under £125,000, you still need to submit an SDLT return. Also, if you exchange properties with someone, then both parties must pay Stamp Duty.

 There are a few exemptions to Stamp Duty, and these include:

  • When a transfer of deeds is a gift or as part of your will, you will not pay stamp duty on the market value of the property. However, you may have to pay other taxes such as inheritance tax.
  • When a transfer of ownership is made as part of a divorce or separation.

For England and Northern Ireland, you can find further information on the Stamp Duty Land Tax website. For Scotland, you can find more information on the Land and Buildings Transaction Tax website. For Wales, more information can be found on the Land Transaction Tax website. 

Ultimate guide to conveyancing

One of the most important people you will require when selling or buying a property or when remortgaging is a conveyancer. The role of a conveyancer is to oversee the legal requirements and to make sure that the mortgage reaches completion. 

Here we take a look at what conveyancing is, their role, and conveyancing costs.

What is conveyancing

A conveyancer or a general solicitor conducts conveyancing. In the case of a solicitor carrying out these duties, they will have specialised in conveyancing legal work and property law.

The role of the conveyancer is to transfer ownership of land or property from one owner to another. Split into two parts; conveyancers arrange the exchange of contracts, which lays out the agreement and its details. The second part of the process is called completion, and this is when the legal titles get passed from one owner to the other.

Property surveys

It is possible to arrange a mortgage before making an offer, and your bank or mortgage provider will inform you of how much they are willing to lend. This offer is called an Offer in Principal.

Formal property surveys determine if the property is valued in line with the offer you make. A survey may also check the structural state of the property.

There are three types of property survey:

  • Valuation survey
  • Homebuyer’s report
  • Full structural survey

Valuation survey: This is a basic survey but useful for remortgages or new build purchases. This survey does not include a structural check.

Homebuyer’s report: This will check the condition of windows, roof, and general state of repair, including a check for subsidence.

Full structural survey: This is essential for renovation projects, and although it is more costly, it makes sense for renovations. 

Draft contracts, exchange of contracts, and completion

When an offer is made, a draft contract is drawn up by the seller. The draft contract states the purchase price, planning restrictions, and boundaries, as well as other details. The draft also stipulates the transaction completion date and includes the Energy Performance Certificate. You should take a close look at the contract, and if required, negotiate new terms with the guidance of the solicitor or conveyancer.

Once the draft contract has been agreed upon, the seller and buyer sign the contract. This exchange of contracts is legally binding, so it is vital to be sure of the purchase and its details. A deposit is typically paid at this point; the buyer becomes responsible for the new property and home insurance.

The completion day is the final step in the conveyancing process. While completion can occur within a few hours, most buyers wait between one and four weeks to allow the last checks to be completed.

The remaining payment is now made. The mortgage lender or bank will transfer the funds, and you must wait until this is completed before taking ownership of the property or land. Once paid, you can collect the keys and enter the property. The conveyancer’s final duties include registering the ownership of the property with the Land Registry and paying your stamp duty.

Conveyancing costs

The costs that the conveyancer issues are split into two distinct categories:

  • Disbursements – This covers work completed by third parties, who for example, conduct surveys and searches 
  • Legal fees – This includes the basic work of the conveyancer

Conveyancing costs and fees vary, and they are affected by the following:

  • Property value
  • Property tenure
  • Legal fees
  • Disbursements

Property value: Conveyancers often take property value into account with fees set as a percentage of the properties value.

Property Tenure: Freehold and leasehold properties have different legalities and associated paperwork, which effects the conveyancing fee.

Legal fees: These vary from case to case and depend upon whether you are selling, buying, or both.

Disbursements: Searches and surveys differ in each case.

Why you should use a conveyancer’s

You can do the duties of a conveyancer yourself, but this role takes a lot of time and is complicated. You can end up in serious trouble if something goes wrong. It would be best if you chose a licenced conveyancer because they are experts.

In England and Wales, conveyancers are regulated through the Council for Licensed Conveyancers or CLC. In Scotland, the selling and buying process differs, so it is advisable to use a local conveyancer.

How to choose a conveyancer

It makes a lot of sense to choose a conveyancer that is recommended to you and works in the local area of the property or land. You should check legal fees and what they include before instructing a conveyancer. You should also review if legal fees still apply if the sale falls through because these can run into hundreds of pounds.

What mortgage type is right for me?

Unless you’re lucky enough to have the cash in the bank when you buy a property, you’ll need a mortgage. The type of mortgage you’ll need will depend on what you’re doing with the property.

Different types of mortgage include;

  • Repayment mortgages
  • Interest-only mortgages
  • Combined mortgages
  • Buy-to-let mortgages
  • Commercial mortgages

The majority of mortgages taken out in the UK are used to buy homes. Still, other mortgage types allow you to buy a property and rent it out or buy a business premise such as a shop or office.

I want to buy a home

Then you’ll need one of three types of mortgages

  1. Repayment mortgage
  2. Interest-only
  3. Combined rates

Read our guide to buying a property.

What is a repayment mortgage?

A repayment mortgage is a loan where the monthly payments will eventually pay the whole amount owed back. First-time buyer mortgages typically range from 25-35 years. 

What is an interest-only mortgage?

Usually a lower monthly payment than a repayment mortgage, an interest-only mortgage only pays the interest on the loan. At the end of the mortgage, you’ll still owe the same amount. 

What is a combined rates mortgage?

A blend of repayment and interest-only, so at the end of the mortgage term some of the loan will be paid off. 

I’m buying a property to rent it out

You need a buy-to-let mortgage if you plan to buy a property and rent it out to tenants. Most of the criteria for a buy-to-let is the same as a standard mortgage. 

I’m buying business premises

If you want to buy business premises, such as an office or a shop you’ll need a commercial mortgage. Commercial mortgages are available as both repayment or interest-only – your financial/mortgage advisor will be able to advise which is best for your business.

Why use a mortgage advisor?

The benefits of mortgages advisors, like Friends Capital, is that they are independent from individual lenders. Being independent means, they look at the whole marketplace to make sure you get the best deal based on your circumstances. 

The most significant benefit is that they put care and attention into every single mortgage application. The ensures it has the very best chance of being accepted by the lender. 

Friends Capital are unbiased mortgage advisors, contact them today for advice. 

 

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