The life of a freelancer comes with many benefits. Being able to choose where and when you work, the diversity of projects you’re involved in, the freedom to select which clients you do (and don’t) work with, and beyond.
Freelancing brings with it many wonderful opportunities around flexibility and professional autonomy. However, being a freelancer can also complicate some areas of life that aren’t quite so fun to deal with – one of which is securing a mortgage.
In the past freelancers had to use self-certification mortgages, where you would simply tell the lender about your earnings. Due to abuse of the system, these mortgages were branded ‘liar loans’, because people would exaggerate their income to get a bigger mortgage. They have since been banned by the Financial Services Authority, to protect both lenders, and to help prevent borrowers getting into financial difficulties.
Is it harder to get a mortgage as a freelancer?
Sadly, not all mortgages are created equal. The application assessment for a full-time high-salary PAYE employee won’t look the same as a mortgage application assessment from a freelancer.
This is because freelance income is considered to be far more unpredictable than a salaried income. The fluctuation which is so synonymous with freelance cash flow can be a red flag to mortgage lenders when they’re assessing whether you can afford (and pay back) what they might lend.
Why mortgage lenders look at employees and freelancers differently
- Employees of a business are usually paid a basic annual salary, which means that mortgage lenders can more easily assess affordability. Without business expenses to think about, outgoings are also likely to be more stable and predictable.
- Freelancers, on the other hand, can’t provide that same level of certainty. Income can fluctuate, and there are also business expenses to consider. Which is the spanner in the works when it comes to getting a mortgage.
One of the problems is that different lenders have different ways of approving people. Some will only ask for a year of accounts, others will demand to see three years. If you’re new to freelancing or running your own business then this can be particularly troubling.
But just because securing a mortgage is a little more challenging for a freelancer, doesn’t mean it can’t be done.
The even better news? Following a steady growth in the UK freelance and self-employed workforce over the past few years, lenders are now being forced to rethink their policies. Mortgage lenders are having to consider more complex financial situations that stray from the conventions of traditional basic salaries and ultimately, become more flexible and inclusive.
How much can a freelancer borrow?
There isn’t a cut and dried answer to this because borrowing is usually based on your annual income, and how this reflects your ability to meet your repayments. So if you earn £85,000 per year through freelance work, you’ll likely be able to borrow a great deal more than a freelancer earning £30,000.
Do freelancers have to put down bigger deposits on properties?
Officially, no, but the bigger the deposit, the more attractive (and reliable) you’ll appear to a lender. If you can save up a deposit of 20-25% great, but if you can pull together a 30-40% deposit then even better.
However, that’s not to say you won’t be considered for a standard 5% or 10% deposit application as a freelancer. It really does come down to your financial circumstances, getting advice from reputable specialists, and researching your options meticulously.
What can freelancers do to help secure a mortgage?
So, you’re a freelancer looking to secure a mortgage. There may be some hurdles, but there are ways to mitigate these and give yourself a better chance of securing mortgage approval.
Get some freelance miles under your belt before applying
Mortgage lenders can be wary of freelance applicants due to the higher possibility for unreliable income. For this reason, it’s useful to have at least two or three years worth of freelancing financial records available before approaching any lenders. You’ll still need to demonstrate your plans for the future, but historical information helps reassure lenders that you know what you’re doing. It’ll also give you more time to increase your deposit!
Find an accountant to help you with your mortgage application
Lenders prefer it if you to have an accountant because it’s another marker of stability. A good accountant will help you keep your finances in order, which means you’ll have solid, credible records to show lenders.
It’s also worth remembering that a very good accountant will advise you on how to be more tax efficient, but without minimising your taxable income to an extent which damages your income figures for a mortgage application! much as this will affect your ability to get a mortgage. Check out our guide to choosing the right accountant for you.
Keep good credit and business records
A lender will do a credit check on you and your business. You should make sure you keep good records (and this is where decent bookkeeping software will be a lifesaver), and keep a close eye on your cash flow. Try to pay off any late or unpaid loans so that your credit score is as clean as possible.
Maintain a good client list
You will need to show you have a steady stream of income, which is harder to do if you’re a freelancer. With a good marketing plan, online presence, effective pitching, and the ability to handle a variety of clients, you can minimise the risks.
Don’t just rely on one big client who will leave you in the lurch if they go elsewhere or go bust. Having several clients is the freelance equivalent of not putting all your eggs in one basket.