More and more Britons are becoming self-employed, and it’s easy to see why: the ability to be your own boss, work on projects you are passionate about and make your own schedule and work routine are all attractive prospects. One thing being self-employed does complicate, however, is the process of getting a mortgage.
Investing in property is a good way of securing a stream of regular income, but the process of qualifying for one can be complex when you’re not in permanent employment. In today’s article, we’ll cover some of the basics of applying and getting approved for a buy-to-let mortgage. We’re only able to really scrape the surface of this topic here, so if you have questions about BTL mortgages for self-employed individuals after reading this article, don’t hesitate to get in touch with our experienced mortgage advisors for some more information.
Why invest in property when you’re self-employed
As a self-employed professional, your income can fluctuate from month to month due to things outside your control. Investing in buy-to-let property offers you a reliable source of extra income to boost your monthly earnings and provides a bit of a safety net for you.
Of course, this form of income isn’t 100% dependable – your investment property might be empty for a period of time between tenants and unexpected repair and maintenance costs are all but guaranteed every now and again – but on the whole, choosing buy-to-let property as your investment route is a smart move when you’re self-employed.
You might even dream of making property investment into a side hustle or eventually even your sole source of income – this goal fits well around the flexibility offered by self-employment in your “day job”.
What you need to know about self-employed mortgage applications
The first thing we need to clarify is that there’s no such thing as a “self-employed mortgage” – you have access to the same BTL mortgage products as your employed peers.
After the 2014 ban on self-certified mortgages where you didn’t have to evidence your earnings, the process of applying for a mortgage of any kind as a self-employed individual has become more complex – but certainly not impossible, especially if you get some help from an accountant and a mortgage advisor experienced with self-employed BTL lenders.
Because your income is less dependable than that of applicants in steady employment, you have to do your homework, or alternatively, work with a seasoned expert who can provide you with all the information you need and shop around for the right mortgage product for you.
The most commonly seen advice about self-employed mortgages is that you typically need at least three years’ worth of trading history to qualify for one. While this might be an alright rule of thumb for the residential market, things are slightly different when it comes to buy-to-let lenders. A more accurate rule of thumb is that getting a BTL mortgage is much easier if you’re an experienced landlord, sole trader/contractor, or both.
Even if you’re fairly new to self-employment or don’t have high earnings from it, you could qualify for a buy-to-let mortgage if you can evidence a good track record as a landlord and that your new property is likely to attract a profit of 125% or more of your mortgage interest.
One way to improve your chances of qualifying for a good mortgage product include investing in a property that they think will be easy to sell. A new-build home, high-rise flat, a property above a retail unit or one with an unusual structure are all examples of the types of properties lenders are wary of offering BTL mortgages for. A lender will also consider what kind of a profit you can expect when renting your property out, preferring to offer a mortgage to those who can expect at least a 125% profit.
You can typically expect a loan-to-value ratio of at most 75% on most buy-to-let mortgages. This means you’ll need a fairly sizeable deposit. Opting for a loan with a low LTV (60% or below) will also improve your chances of being approved.
Why opt for an interest-only mortgage
Like we already mentioned in this article, one of the best reasons to invest in buy to let property when you’re self-employment is the (more or less) dependable income this provides when your take-home pay from your self-employed work might change month-to-month. Opting for an interest-only mortgage for your investment is likely to be your best bet for the very same reason.
The lump sum of an interest-only mortgage is payable in full at the end of the mortgage term and your monthly payment is a small one covering solely the interest on the capital borrowed. This means an interest-only mortgage is a practical option for self-employed property investors. It means you can keep more of your rental income which will come in useful during leaner months.
Lower monthly payments that only cover your interest also means your lender doesn’t have to rely on your income from your main employment as much when calculating the affordability of your mortgage. As long as you have a sizeable deposit, you can expect a healthy ‘Return on Investment’ in terms of rental income and can foresee selling the property at a profit later on, you don’t need to have huge earnings in your self-employed career to invest in rental properties.
If you’d like to learn more about interest-only mortgages, read our article dedicated to the subject over on our blog.
Acquiring a buy-to-let mortgage when you’re self-employed can be a long, arduous process, which is why having some expert help is so valuable. Our experienced mortgage advisors and property investment managers will work with you every step of the way through your investment journey: we’ll help you source the right kind of properties, act as your mortgage broker, find you tenants and even step in as your property manager so you can enjoy a truly passive income from your investment. To learn more, check out our property investment page.