When I knew I was about to quit my job and work for myself full time five years ago, the first thing I thought about was the possibility to get access to credit down the road. I had a good credit score, and had been working with the company for long enough to qualify for a mortgage, so I decided to buy a property before quitting.
It was risky, as I didn’t know if my self-employment income would always be able to cover the mortgage, but I took a leap of faith and went ahead anyway, thinking it would be much easier to get approved than once I was on my own.
Surprisingly, even with a good salary and low expenses, the bank gave me a hard time. So I can’t even imagine what it would have been like without a steady payslip. Another thing I am glad I did before leaving full time employment was to increase the limit on my credit cards. That process was pretty painless, and while I always pay my balance in full by the end of the month, it was an extra security in case things got tough, I could still charge some expenses and pay them the next month, as I would work extra hard to get new clients and get them to actually pay me on time.
The problems of self employment in order to get a mortgage applies to a wide range of people, freelancers, contractors, small business owners… When you get started with your new endeavour, the bank has no track record on which to base its assessment, so unless you have a lot of cash and will only require a tiny mortgage, chances are you will have to wait for a few years, until you can provide two or three solid tax returns in a row, and convince the bank to give you a chance.
Even when I was employed, the bank wouldn’t take my bonuses into account, as they weren’t guaranteed income. I was also receiving additional income on the side from after hour odd jobs, but again, since it hadn’t been a full tax year since I had started, I didn’t have P60s to show for it, and the bank wouldn’t include it.
Often, when two partners or married people ask for a mortgage and one of them is self-employed, they will get the mortgage only in the other person’s name, to smooth the process. I am not a fan of that kind of set up, as I have talked about previously, as things may go wrong in the relation, and you may end up with no roof, and no rights to claim it back since you don’t appear on the loan.
So before you consider such an arrangement, I would strongly recommend you talk to your accountant or financial advisor and ask around for other opinions. The bank might agree to put both names on the mortgage even if only a small part of your income is taken into account in their affordability study.
House prices are rising and it is sometimes hard to find affordable housing when the bank will only lend you 3-4x annual earnings, but it is also a safety, in case your work load and income drops, to make sure you can comfortably repay the mortgage.
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