Last reviewed on 9th March 2022
Freelancing has become a popular trend over the years. If you’re a freelancer, you may benefit from working with many different clients and have the flexibility that traditional employment rarely has. In comparison, getting a mortgage as a freelancer can be difficult when compared to regular employment.
If you’re employed and freelance in your spare time, using income from freelance work towards your mortgage isn’t always a straightforward task. Having said that, lenders are aware of the increase in mortgages for freelancers and will consider income from freelance work.
There are now over 2 million freelancers in the UK and this number is increasing, especially since the pandemic. Each lender will consider freelance applicants, but each has different assessment criteria. While it may be easy to get a mortgage as a freelancer with one lender, it can be difficult with others.
This guide will cover everything you need to know about applying for a mortgage as a freelance worker. Our experts are also available to answer your questions.
Are mortgages for freelancers different to regular mortgages?
It’s first important to explain that mortgages for freelancers and mortgages for employed applicants are exactly the same. There aren’t any particular mortgage deals for freelancers. The only difference between a freelancer and an employed applicant is how a mortgage application is assessed. What this means is, each lender will assess your employment status and income, among other factors such as your credit history.
If you’re a freelancer, applying for a mortgage is often far from easy but that’s not to say you shouldn’t apply. This is because freelancing has varied income each month which often fluctuates. Sometimes, the difference in income can raise concerns regarding your affordability.
When compared to employed applicants, lenders are able to see a clear annual income or base salary. This allows lenders to gain a good understanding of what an applicant earns and is projected to earn. As a result, affordability can be calculated without much difficulty.
As a freelance worker, lenders will assess your application in a different way to employed workers. This is why preparing your application beforehand will not only increase your chances of approval but may also allow you to borrow more.
How do lenders assess mortgages for freelancers?
Freelance work varies quite considerably. For instance, you may have several contracts with companies that span for months, even years. You may freelance for different companies as and when the work comes in. As a result, lenders will assess your application according to your income and the way in which you freelance.
It’s important to show lenders that your income is guaranteed or at least highly likely to continue or increase. The last thing lenders want is for you to take a mortgage and then get little or no work from freelancing. Outlining the stability of your income is crucial in getting a mortgage as a freelancer. This is because you’ll of course need an income to repay your mortgage.
Mortgage lenders for freelancers typically require accounts or tax returns, depending on how your freelancing work is structured. For instance, if you’re a sole trader you’ll require a tax return in the form of an SA302 from the HMRC. If your freelancing work is under a limited company, you’ll need accounts signed off by a qualified accountant.
Employment structures can vary and may overlap, so do consult an advisor if you’re unsure about which category you fall under.
How much income history do freelancers need for a mortgage?
Most lenders require at least three years of income history. Some lenders may approve you even if you’ve only been freelancing for one year. Having contracts for future work can also help your application. Nonetheless, you’d need to have an income history for at least one year if it’s the only income you have.
Having been a freelance worker for a number of years with a proven track record will place you in a better position than if you’ve only been freelancing for a short period of time. That being said, if freelancing is an additional income to other work or income from investments, most lenders should consider you.
Some lenders are more suitable for self-employed applicants, largely due to the flexibility in their assessments. This is because other lenders can be more strict in their approach when assessing freelancers. One lender may accept you if you’ve only been a freelancer for one year, whereas a different lender could request up to three years of accounts.
If you’re unsure of what to do, make an enquiry with an advisor who will inform you of what’s possible. Don’t risk applying directly with a lender yourself. If you’re declined, it will leave your chances of getting a mortgage very slim.
How much can a freelancer borrow?
As a freelancer, your income is likely to fluctuate from year to year. As a result, many lenders will use an average of the last three years to establish your affordability.
It’s important to understand what a lender will class as an income. Whether a lender uses your salary, net income or daily rate, depends on how your freelancing work is structured.
If you’re a sole trader, lenders will use your net income to establish your affordability. If you’re a director of a limited company, lenders may consider your salary and dividends. Some lenders may even allow you to use retained profits in a business.
If the majority of your freelancing work is based on contracts, lenders are likely to assess the overall value of your contracts. Other lenders may base your affordability on your daily rate.
Once you’ve established the income a lender will use to calculate your affordability, you’ll be able to work out what you may be able to borrow. For instance, most lenders will typically allow you to borrow between three and five times your annual income. Whether that’s based on net profits or retained profits or even a salary, will all depend on what you’ve declared and have documented.
Use our self-employed mortgage calculator to find out how much you can borrow as a freelancer.
Will I need a large deposit?
Using an income from freelancing can raise issues when applying for a mortgage, particularly around affordability. That’s why a larger than average deposit can boost your chances of approval quite considerably. Lenders base their decisions on the risks involved with each applicant. Saving the largest deposit possible can minimise the risk attached to your application.
Aim for a deposit of at least 25%. You may also benefit from the best deals if you’re able to save deposits of 30-40%.
Please bear in mind that there isn’t one rule for everyone. If your freelancing income is well documented and in proportion to what you want to borrow, you may qualify for a mortgage with a 5% deposit. Nonetheless, larger deposits do have advantages such as better rates and can add credibility to an application.
Mortgage advice for freelancers
It’s crucial to speak to an advisor that has experience in mortgages for freelancers. If your application is high-risk, you could be declined. Specialist advisors will tell you whether a mortgage is likely. Furthermore, an advisor that has experience with freelance applications can often structure your application so that it shows its true potential.
Even if an underwriter has a certain issue with your application, advisors are often able to ease any concerns by providing the correct paperwork. Preparation is crucial in getting a mortgage, especially as a freelancer. You can speak to an advisor by making an enquiry below. We’ll then go through your situation in detail to let you know what’s possible.