Warning to self-employed homeowners as lenders make major change to mortgage rules in days
SELF-employed workers have been urged to submit their tax returns now if they are looking to move home in the coming weeks or months.
From October 5, the majority of mortgage lenders will ask for 2023/24 tax returns as proof of earnings.
HMRC doesn’t require the 23/34 year’s tax return to be submitted until the end of January 2025, meaning that many workers will not have yet completed it.
“Lenders see documentation over 18 months old as too historic to accept,” said Chris Sykes, technical director at mortgage broker Private Finance.
This means that anything relating to the end of the tax year April 5 2022/23 becomes out of date from October 5,
Chris said self-employed borrowers get caught out by this every year as the date isn’t advertised by lenders.
He added: “This will affect any self employed borrower looking to buy their first home, move house or remortgage over the next few months.
“Unlike an employed borrower just on a salary, a new year’s self employment figures can significantly change the borrowing upwards or downwards.”
Nicholas Mendes, technical manager at broker John Charcol agreed that this is a big issue for self-employed borrowers and they often oly become aware when starting the mortgage application process which can then create delays.
He said: “We see this issue arise quite frequently with self-employed clients—many are unaware that, even though HMRC gives them until January 2025 to file their 2023/2024 tax returns, lenders may not accept their older 2022/2023 tax returns after October 5 of this year.
“This mismatch in timelines often catches applicants off guard, leading to unexpected delays or issues in securing a mortgage.
“It’s a significant challenge because while the HMRC deadlines are designed to be lenient, lenders operate on much tighter expectations regarding financial documentation.”
If you can’t submit your tax return until later in the year, self-employed borrowers need to race against the clock to get a mortgage application in before lenders start rejecting their 2022/23 return.
Chris said there are some exceptions as a few lenders have a slightly longer window – but these are usually specialist lenders.
Specialist lenders often charge higher rates than mainstream lenders which means borrowers could end up paying more for their mortgage than they would otherwise.
The deadline for registering for a tax return for the first time for the 2023/34 year is also October 5.
There’s no penalty for registering after this, but if you haven’t signed up, filed your tax return, and paid your bill by January 31 you will be fined.
How to get a mortgage when you’re self-employed
Self-employed people can sometimes find it harder to get a mortgage as income can be more changeable than when you’re employed.
You will usually need at least two years of accounts and lenders will use these figures when deciding how big the mortgage offer will be.
Chris added: “We more often than not find self employed people don’t understand how a lender will look at their income, many think they are judged on their turnover when they are judged on their profit.”
Lenders may want to see more evidence of your income since you don’t have an employer to back you up.
This means all your accounts will need to be in order. It can be worth using an accountant if you don’t already to help you do this.
Lenders like to see consistent profits, and consistent earnings levels where possible. If there are fluctuations it needs to be understood why that is the case.
Keeping your financial documentation up to date can significantly increase your chances of a smooth mortgage application process and help avoid unnecessary stress or delays.
An independent mortgage broker can help advise on the process and give you an idea of any additional documentation you may need to get your application through.
In some cases, self-employed workers might find they need a bigger deposit and a strong credit score to get a home loan.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.