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By Helen Crane For This Is Money
I'm saving for a deposit to buy my first home and, although I have a full-time job, have taken on some extra work in the evenings and weekends in order to boost my savings.
I work as a website designer and have been taking on freelance projects, mostly for friends and family. I pay tax on this income via the self-assessment system.
I also work some weekend shifts in a pub, which are paid via PAYE.
I don't plan on carrying on my part-time job after I have bought a house, though I will probably continue with the freelance work.
'I have been working in a pub alongside my main job to help me save a mortgage deposit quicker – does my mortgage lender need to know?'
I should be able to qualify for the mortgage I need with just my main salary, but I am wondering whether I am required to tell the lender about my extra work too.
If this is not compulsory, would it help or hinder my application to include it?
I am unsure whether the freelance work in particular would be counted towards the affordability assessment.
If it is counted, I am worried that the lender might think I wouldn't be able to afford my mortgage payments if this work dried up.
Is it better to declare one or both of my extra income sources, or should I just use the money towards my deposit without telling my mortgage lender where it came from? D.G, London
Helen Crane, This is Money, says: Saving up to buy your first home is tough – and this has been exacerbated in the past year by accelerating property prices.
First-time buyers without chunky salaries or support from their relatives are faced with two options: save up for longer, or find a way to top up their deposit through extra work.
You have chosen the latter, and taken on not one but two jobs on the side in the hope of realising your home ownership dream sooner.
Nearly two thirds of first-time buyers have a second income source, according to a survey
You are not alone. According to recent research from Ipswich Building Society, 64 per cent of first time buyers claim to have a second source of income to help them save for a deposit, with this figure rising to 85 per cent in London.
The earnings from this extra work account for two fifths of a deposit on average.
With a typical first time buyer deposit sitting at almost £59,000, that works out at £23,020 being generated from so-called 'side hustles'.
But at the same time, full-time freelancers and those who rely on commission and bonuses have found it tougher to get accepted for mortgages throughout the pandemic, as banks became more cautious about lending to those without guaranteed incomes.
So should you tell your mortgage lender about your work on the side when it comes to applying for a loan?
We asked three mortgage experts for their thoughts: Kevin Davis, head of direct mortgages at Ipswich Building Society; Matt Coulson, director at broker Heron Financial; and Mark Harris, chief executive at broker SPF Private Clients.
The first thing to consider is whether you will need the income from your freelance or part-time work in order to qualify for the size of mortgage that you want.
Generally, lenders will be prepared to advance borrowers around 4.5 times their annual income - though they may reduce this for customers who are in theory less reliable, such as first-time buyers or people with poor credit.
In recent times, those who get the majority of their income from freelance work have also been penalised by lenders with lower loan-to-income ratios – but this should not be a problem for you as you also have a full-time, salaried position.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: 'Much depends on whether the applicant needs the additional income to boost their borrowing potential.
'If it is not required, then there is the option to leave it off.
'Of course, if you need that income to be considered in order to get the mortgage you want, then the situation is rather different.'
According to Ipswich Building Society, lenders will only become aware of a buyer's part-time or freelance work if it is declared during the application process.
This would mean the additional income could potentially be used for the affordability assessment.
These are the checks the lender carries out in order to decide the size of the mortgage they will be willing to offer.
However, declaring the freelance work or part time job is not a guarantee that they will be taken into account.
Depending on the nature of the work and the lender's own policies, they may decide not to include it in their calculations.
Kevin Davis, head of direct mortgages at Ipswich Building Society says: 'With the impact of the pandemic, along with increasing house prices, you might expect younger people to be put off seeking a mortgage, but as many as two in three are taking on second jobs to buy their first home.
'While working on an additional stream of income shows a commendable effort and signals the traits of a reliable borrower, there's no guarantee it will be taken into consideration for ongoing mortgage repayments and it's something first time buyers should be aware of before they apply as they could be turned down on this basis.'
Lenders' checks are designed to make sure the borrower will be able to keep up with their future mortgage payments.
Therefore, any income that will not continue after you have bought a home will not be included – for example your part-time job in a pub, if you did not intend to keep on working there after buying your home.
Matt Coulson, director at Heron Financial, says: 'When you have multiple income sources, there will be questions from the underwriter about the sustainability of these.
'As a rule, the only income you can declare on your mortgage application is that which you will continue to receive.
'The work which will cease on completion of your mortgage can't be used towards affordability checks by the lender, however it can be referenced in your application notes to support.
'On the other hand, your freelance work could be considered, but only that which has had tax applied – so the key here would be how long you have done this work for, how long you plan to continue doing it, and whether you have already completed any tax returns against it.'
For any kind of income to be included as part of the affordability assessment for a mortgage application, you will need to be able to provide proof of that income – whether that is through payslips for a PAYE job, or through a tax return for freelance work.
First-time buyers, and anyone else with a side hustle for that matter, should also check with HMRC about what constitutes additional income and when this needs to be declared for tax purposes.
Freelancers declaring their income will need to give the bank evidence that they have paid tax
First time buyers may also need to ensure they are not breaching any contractual obligations with their main employer too.
Davis says: 'If they do wish for this income to be used in affordability assessments, and not just as a means to build up a deposit, then they need to demonstrate that this income is ongoing and provide payslips, in addition to those of their regular, employed income.
'Where the additional income is from self employment, applicants should be prepared to provide a tax return as evidence.'
At the beginning of the pandemic, lenders took a cautious approach to lending when it came to people who did not have salaried jobs.
This included freelancers, the self-employed and company owners, for example, with some reporting that they were turned down by multiple lenders because of their employment status.
As you have a full-time job alongside your freelance work, this should not apply to you. However, the situation for people who do not do salaried work is improving.
Harris said: 'During the height of the pandemic, applications made by self-employed borrowers, even where part of the income was from being self-employed, the lender would take a more thorough, forensic approach to underwriting and there were some lending caps – for example, on loan-to-income or loan-to-value.
'Thankfully, the direction of travel is reversing on some of those restrictions so the environment is much better now than it was six months ago.'
Ipswich Building Society's survey asked first-time buyers how they were earning extra income for their deposits.
A third had started a business, half of which were related to their main job.
Other common forms of side hustle included taking on informal work such as a bar job at weekends in addition to their main career (23 per cent), or using skills from employed roles to earn extra money on the side (22 per cent).
A fifth (21 per cent) were prepared to do domestic work such as childcare, gardening or cleaning to raise that all-important deposit.
Two thirds (66 per cent) of those surveyed were considering continuing the extra hours to help fund house renovations or furnishings once they had purchased a property.
Helen Crane, This is Money, replies: Whether or not you use it on your mortgage application, you should take pride in the fact that you have worked so hard in order to buy your first home.
If you are set on quitting your bar job once you have put down the deposit, that unfortunately cannot be counted as income for mortgage purposes, as you need to prove that any income used in the affordability calculation will still be received going forward.
Different lenders have different policies on income from freelance work at the moment, but it would be worth including this in your application as it may be counted – provided that you intend to carry this on, and have already submitted a tax return for some of this work.
While you say that you should be able to get a mortgage using your main salary, including the freelance work would possibly increase the amount you could borrow.
However, you should work out your future monthly mortgage payments and be careful not to overstretch yourself, as there is always the possibility this work could fall away.
If that happened, you would need to be sure you could afford the mortgage with just your salary.
I wish you the best of luck getting on to the ladder, and being able to leave your pint pulling days behind.Advertisement
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