More and more people take the brave step to choose self-employment every year, becoming their own boss while chasing their dreams and building a business. Fortunately for them, the lenders have noticed this trend. In fact, mortgage providers offer surprisingly flexible options for self-employed borrowers. The fact that buy to let mortgages offer self employed workers an extra source of income opens up interesting avenues for all parties to enjoy.
How Buy to Let Mortgages for the Self Employed Differ From the Norm
Of course, mortgage lenders hand out contracts in the hopes that you’ll be able to repay them. With mortgage candidates in regular employment, lenders know exactly how much they make. They, therefore, know exactly how much they want to lend and at what rate. Self-employed earnings fluctuate, but you can still prove your financial circumstances to the lender.
Financial records demonstrate to lenders of your potential and support your mortgage application. Some lenders require three years of accounts before handing out buy to let mortgages for the self-employed. Others only ask for one or two. However, lenders know the exciting potential that self-employment brings, so they also look to other factors when working out affordability and purchasing power.
Other Factors Lenders Consider
The stand-out factor for buy to let mortgages is that the mortgage itself generates profit for the borrower. The rent generated from the mortgaged property typically helps pay off the loan.
In fact, the self-employed business itself may focus on a property portfolio. Lenders may not even take your current cash flow into account when considering your application. Instead, your business plans and projections may be enough to win them over. Beyond that, your experience with property and your credit score both play a part in securing a deal.
Crunching the Numbers
While buy to let mortgages for the self-employed can unlock a reliable income stream, they don’t come without cost. These deals generally require a larger deposit than standard mortgages, at around 75% loan to value (LTV). This means you’ll have to raise a deposit that’s a quarter of your chosen property’s total value.
Lenders often charge a higher rate on buy to let mortgages, but most borrowers opt for interest-only repayment plans. This interest only-option stems from a borrower’s objectives when taking the loan.
The Purpose of a Buy to Let Mortgage
Borrowers take out personal mortgages with the ultimate goal of owning a home. Buy to let mortgages, by contrast, are purely an investment to generate income and diversify assets. This means that buy to let mortgage candidates are more likely to choose interest-only repayment plans on their loans, as their tenants pay off the interest and create profit regardless of equity. Of course, this can change based on the mortgage holders financial situation, as they may be keen to gain equity and venture into the market again.
In either case, lenders often ask the borrower to outline a financial projection in which the borrower charges 125% to 145% of the mortgage repayment fees in rent. This sustains the mortgage and keeps the deal rolling. These expectations vary based on the borrower’s finances, the value of the property, and the size of the deposit.
How to Get a Deposit to Fund Your Mortgage
You might already have enough in the bank to invest a quarter of a property’s value into a buy to let mortgage. If so, then feel free! However, that’s not always the case. You might already own a home or even a property portfolio. Some borrowers raise a mortgage deposit by taking charges on their existing assets. Others negotiate investments with family members or business partners, and some create agreements in principle with their prospective lenders while they gradually save for a deposit.
Purchasing Structures for Buy to Let Mortgages
Taking the loan as a private citizen might be the simplest way to take out a buy to let mortgage. However, self-employed borrowers enjoy other opportunities on account of their business (themselves). Some self-employed borrowers found limited companies, partnerships, or Special Purchase Vehicles (SPVs) to acquire a valuable income stream with a buy to let mortgage. When borrowers take on a loan as a business, they’re charged at a corporate tax rate, rather than personal earnings. This switch proves favourable for many self employed borrowers, especially for high earners.
Conclusions: Best Practices With Buy to Let Mortgages for the Self Employed
Deals like these can unlock huge benefits in revenue for self-employed borrowers, along with valuable life experience as a developing investor. However, the risks involved, and the shifting variables, often require expertise and insight to secure the best deals. Conducting your due diligence, and working with a professional mortgage broker, gives self-employed borrowers the best chance to succeed with their buy to let mortgage opportunity.