You know that we have a rather audacious aim: to make £2.5 million (or equivalent which is about £10,000 per month in passive, or as good as, income per month) by October 2018.
No, it isn’t so that we could spend it on yachts, drugs and rock-and roll (though, we may have some interesting trips). We reckon this is the level at which we could be truly financially independent, live the live we want and do some good in this world. You know, my guiding moral principle is to try and leave the world a better place; failing that, I intend to leave it no worse off.
To achieve this, John and I are working hard and smart. I’ve been supplementing my salary as university professor with side hustles and investments. John has been following his passions and hustles.
One thing I’ve learned is that it is tough being your own boss; you need bags of self-motivation, self-belief and discipline. You also need a clear plan of what will make you and your business successful.
Being freelance (self-employed) also means that you ought to organise your personal finances in a different way.
I have tremendous admiration and respect for the 1 in 7 people who are self-employed in the UK according to the National Labour Statistics Office of National Statistics.
Recent research by Ipswich Building Society into self-employed mortgages has revealed that 2 out of every 5 self-employed people who already have, or intend to get, a mortgage are concerned they will not qualify for a mortgage in the future because of their employment status.
Furthermore, three quarters of the people approached, felt they their self-employed status would limit their ability to shop around for a mortgage. It is disappointing that the group of people lauded by politicians as the engine of economic recovery following the financial crash in 2008 now feel less credit worthy and may struggle to own, and keep, their own home.
I started to do a bit more digging into some of the underlying causes of the issues those wishing to apply for a self-employed mortgage are facing.
In April 2014 a new set of mortgage regulations were introduced and these placed a requirement on all mortgage lenders to ensure their lending was affordable; affordability also had to be evidenced.
This is not necessarily a bad thing: I know from personal experience what being in too much debt can feel like.
However, as a result some mortgage lenders have now found it harder to meet the needs of those applying for a self-employed mortgage. All mortgage applications are now assessed very strictly and require evidence of income and expenditure to ensure the mortgage is affordable.
Proving your income and expenditure can be more complex when you are self-employed; this is not just easily accessible wage slips or payments on your current account statement. Larger lenders who use automated processes and computers to make their lending decisions can sometimes struggle to deal with this increased complexity and have been deterred from offering mortgages for the self-employed.
There are lenders, however, often smaller specialist banks or regional building societies, who offer mortgages for self-employed. They use a process called manual underwriting. This means they use people, their highly trained employees, to make lending decisions. They don’t use computer scoring to assess an application. Instead they apply their knowledge and experience in handling self-employed mortgage applications to study each application on its own merits.
As a result, these lenders can handle more complex arrangements regarding the financial circumstances of self-employed people. It is interesting to note that the research from Ipswich Building Society also identified that 63% of respondents felt most mortgage lenders did not understand their needs – so perhaps there is more work for lenders to do.
The mortgage application process today is more robust than ever before and requires greater planning and preparation. The same is true for those applying for a self-employed mortgage, with some additional requirements including the performance of the business. This is a handy self-employed mortgage video that will take you through some handy hints and tips and help you to be fully prepared for your mortgage interview.
In a nutshell, to have a good chance to apply successfully for a self-employed mortgage you need to:
- Get your accounts signed off by a fully qualified accountant. Most lenders prefer to have 2 or more years of accounts to review. Some will consider mortgages for self-employed with fewer than two years, if the owner has previous experience in the same line of work.
- Ensure you have forecasts for the future performance of your business; the mortgage lender needs to assess your affordability for a mortgage now and into the future.
- Find the right lender for you! You could choose to do this by working with an independent financial advisor or a mortgage broker, but remember to check what their fees for this service are. You could go directly to lenders and in this case you should make sure you speak to them first and establish the type of mortgage for self-employed that they offer. You may also wish to ask them if they decide on mortgages using manual underwriting rather than computers.
You will also need the usual documentation. This will include (but is not an exhaustive list) bank statements, balances of loans and credit cards, any benefits you may receive and details of your household expenses, for example, utility costs, school fees, food bills, petrol, insurances, etc.
Yep; you’ll need to organise your personal finances differently when (if) you are self-employed. This includes having to consider the different requirement and conditions for successfully applying for a mortgage. And watch the affordability of the mortgage yourself – otherwise your home may be at risk.