It takes a fair bit of courage to step out of stable, regular employment and into the world of the self-employed. Not least when it comes to asking how to get a mortgage.
But the idea of being your own boss, managing your time according to your own needs and having financial independence is tremendously appealing. It comes with a caveat though, the safety net of employment and the benefits that come with it will all fall away.
If you’re ill and need to spend a day in bed, it’s a day unpaid. Holiday? Same story.
More freedom = greater responsibility
Being self-employed brings greater responsibility and discipline. From saving for those times you would be getting paid leave as an employee, to ensuring your financial records are in tip-top shape, it’s all on your shoulders.
It’s important to keep business spending through a separate bank account and to keep up to date with tax returns. Often these areas of admin aren’t the most appealing to those with entrepreneurial spirits. Fortunately accountants can be paid to manage this side of things. But ultimately, it’s still up to you to manage basic record-keeping.
According to the World Bank, the number of self-employed people in Ireland in 2019 was at 15.21%. That’s a fair chunk of the working population.
The good news is that while banks do perhaps see this demographic as being more risky in terms of lending funds, they’re not completely unwilling to do so.
Run a tight ship
The nature of being self-employed is generally that you can’t always predict your income. You might trundle along on a pittance, and then a big break comes.
Conversely, you might have a great contract that pays well and on time, and the supplier goes bang, and you go bang with it. This is what the banks find so unnerving with loaning money to the self-employed.
Having said that, you could be employed by what appears to be a stable organisation and find yourself retrenched in tough times. But the banks try not to think about that.
Lending organisations want to see that you’ve been running a good business. So essentially, you just have to prove that. But first, run a good business. Once you can show the bank that you’ve been doing this for three years, you’re likely to have less difficulty securing a mortgage.
You’ll want to register as a sole trader or limited company, both of which have pros and cons, depending on your situation. Keeping business and personal expenses separate is important and may allow you to claim some tax back.
In terms of the more logistical side, it’s ideal to have contracts with your clients. And preferably several, so that you’re not stuck with all your eggs in one basket. If you’re able to show the bank contracts, especially monthly or quarterly ones, they’ll be happy to see the repetitive nature of your business. And therefore, prospective income.
Once you’ve been in business for three years, you’ll have a track record of earnings and potentially a rough forecast. Basically, the bank wants to know if you have what it takes to earn enough to pay the monthly instalments today and in the future.
How can you prove this? You’ll need to produce audited financial accounts, six months of personal and business bank statements, as well as three years’ worth of revenue assessments and tax clearance certificates. You might also need to produce an assurance letter from your accountant stating your profitability and showing a detailed forecast of upcoming contracts. It’s a really good idea to have a reliable accountant who can assist with this and who knows your business and your financial business history.
Do your homework
As with anyone looking to buy a house, there’s a certain amount of planning involved. You need to do the research to understand what you can afford to spend on a house, both from a purchase price perspective, but also regarding monthly repayments.
We have mortgage calculators to help with this. Anyone who buys a house should avoid lending to the limit, but especially if your future is a bit less secure than an employed person.
Another tip is to run a credit check on yourself before you go to a lender. Anyone can do this and it’s free. Simply visit the Irish Credit Bureau’s ICB database. This is the same one the bank will use to check your background. In case there’s any error on the database, you can get it sorted out before you do your application with a lender.
The key is to keep your bank accounts in good condition.
Any lender will go through them with a fine-tooth comb for the last six months at least. Make sure your spending looks reasonable and not excessive, show that you’re a responsible business owner.
Put yourself in your bank’s shoes. Imagine your mate at the pub, who tends to overdo it on the weekends. He comes to you in his shabby jeans and unwashed hair after a few toots and asks you for some cash.
You have another friend, who’s busy studying for a qualification part-time to accommodate his job. He calls you up on a Monday morning with a good reason and a repayment plan with interest.
To whom are you more likely to lend the money? You want to be the second friend in the bank’s eyes. Show that you’re a responsible business owner and that you care for your business.
It’s a good idea to get mortgage insurance as well as unemployment insurance.
Mortgage insurance will cover the shortfall of your mortgage in case you die before it’s paid off. Unemployment insurance will cover your mortgage repayments in case you become ill and can’t work.
The road might be a little longer
Finally, don’t give up. If you make an application and you’re denied finance, the bank will give you reasons why. Fix the issues and try again.
We love working with self-employed people. And to date we’ve helped many of our entrepreneurial clients secure mortgages. Contact us today to find out how we can help you find the home of your dreams.