Self-Employed Mortgages

Is it hard to get a mortgage if you are self-employed?

No, thankfully it’s not. People do think that it can be hard or different, but really there are no additional blockers for anyone self-employed to get a mortgage.

While there are different requirements in terms of documentation, as you don’t have three months pay slips, for example, the whole process is exactly the same as for somebody who is employed.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?

You have access to the same types of mortgages as employed individuals. There’s no difference in what’s available to you.

There are specialist mortgages for self-employed people where criteria may differ slightly, but the standard mortgages available to employed people are equally available to the self-employed. This applies to 95% mortgages too—there’s no difference in the required deposit.

If you’re self-employed, lenders won’t penalise you by requiring a larger deposit, as long as you can provide evidence of income. You’ll only need a bigger deposit if you go down the route of a specialist self-employed mortgage, due to specific circumstances. Generally, you’re eligible for the same options as someone who’s employed.

How many years do you have to be self-employed to get a mortgage? And can you get a mortgage with only one year of self-employment?

These are popular questions, particularly among First Time Buyers or those new to self-employment.

To get a mortgage, you typically need a minimum of one year’s self-employment history. That’s because your income evidence will come from your tax return rather than pay slips. You’ll need at least one full year to demonstrate your earnings as a sole trader, limited company director or partner.

Most lenders prefer to see two to three years of accounts to ensure that your income is stable over time. They need to feel confident that your earnings are consistent and not subject to major fluctuations.

That said, some lenders—both mainstream and specialist—are willing to work with just one year of self-employment records. As long as you can provide evidence of your profit, salary, or dividends, there are options available for you.

My most recent year’s earnings were lower than my average. Will this affect my mortgage application?

Unfortunately, in most cases, yes. Lenders who assess income based on averages will typically look at your last two or three years of earnings – or work with the most recent year if it’s lower.

If your most recent year shows lower earnings, this can reduce the amount you can borrow, unless there’s a good reason for the decrease. Some lenders may take into account one-off expenses, such as capital purchases that have impacted profitability.

For example, we had a case where a company purchased a fleet of vans, which led to a loss in the most recent year. By evidencing this with company accounts, we were able to find a lender willing to overlook the lower profitability. So, while reduced earnings can limit your borrowing, certain circumstances may allow for flexibility.

How much can I borrow as a self-employed person?

How much you can borrow is really down to the lender. There isn’t a quick answer where you can simply borrow four and a half times your salary, for example. It doesn’t work like that. Every lender has their own affordability calculator to decide what you can borrow

There are income multiple rules within that. Those rules apply to self-employed income just as they do to employed income.

Again, you’re not penalised for being self-employed, but it isn’t as simple as taking your income and multiplying it. A lot of lenders will work to 4.49 times income. Some have a maximum income multiple of 4.75 or even 5 times income, and potentially a few specialist lenders may go higher than that.

But that doesn’t mean that you can borrow five times what you earn – because other factors will be taken into account. Your dependents, background credit commitments and overall spending habits are included as commitments in the background.

What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?

In terms of the deposit needed, you are able to secure a mortgage with as little as a 5% deposit if you’re self-employed. There aren’t any different factors or restrictions purely on that basis.

With all mortgages, the larger the deposit you’re able to put down, normally the better the interest rate will be, as the lender’s risk reduces on that loan.

The more you’re able to put down, the better. Ultimately, with a smaller deposit you could find yourself in a negative equity situation. If you are able to, we always recommend putting down as much as possible.

In terms of using a self-employment grant as the deposit, this grant was designed to assist companies and self-employed people through Covid when they weren’t trading and their income reduced.

Realistically, lenders won’t like taking that as a deposit. But to be fair, the self-employment grant is long gone now with Covid so far behind us. That said, lenders will take into account any repayments on the self-employment grant for affordability. It could affect the amount you’re able to borrow with that grant in the background.

What are self-certification mortgages and do they still exist?

Self-certification mortgages are a thing of the past. Ultimately, these allowed you just to tell the lender how much you earned without any proof of income. It was a fantastic way to over-exaggerate earnings and borrow more than you could afford.

Before the financial crash in the early 2000s, there werer a lot of bad lending practices. Self cert mortgages were certainly part of this. 100% or 105% mortgages were another, and caused huge financial issues in the UK.

The Financial Conduct Authority banned self-cert mortgages in 2009 and introduced responsible lending guidelines. So no, they’re not available anymore and it’s very unlikely that they will ever be again.

How will you be assessed as a self-employed mortgage applicant?

First of all, there are different types of self-employment. The first is a sole trader, who works for themselves and their evidence of income is their net profit. You or your accountant will complete your self-assessment tax return every year, which shows what your net profit has been. That is what lenders will take as your income.

It’s not turnover, it’s net profit after operating expenses as a sole trader, as evidenced on your SA302.

You might be self-employed with a limited company, in which case there are a couple of different methods lenders use. The most common is to look at your director’s salary and any dividends paid. Again, this can be evidenced on your SA302 or from the accountant.

In certain circumstances lenders will look at different forms of income evidence. For limited company directors who decide not to take all their profit as dividends, some lenders consider your director’s salary plus your share of the limited company’s net profits. In some circumstances that could be a better model for you – especially if you’ve left a lot of money within the company and you haven’t drawn it all down as dividends.

At the moment, most lenders look at the director’s salary and share of net profit after tax, but a couple of lenders will look at your share of net profit before tax, which is a really good way to stretch income. We can potentially assist you in getting to that higher figure.

That being said, it doesn’t always mean you will get your preferred interest rate – you’re going down the specialist criteria route, and a very limited pool of lenders that will do that.

Will IR35 affect my mortgage application?

IR35 is a whole different area. It’s something we need to cover on our contractors page. IR35 fits under a different section of mortgage applicant types, who are contractors.

While they may see themselves as self-employed, under IR35 they’re taxed at source so they fit under a contractor mortgage. Mortgages are available for people under IR35, and you need to visit our contractors page where we’ll cover that in more detail.

How will a lender calculate my self-employed mortgage earnings?

It’s very simple with a sole trader – your self-employed earnings are your net profit. That’s your turnover minus your expenses. Your net profit figure is evidenced on your SA302.

With limited companies, lenders either look at your director’s salary and your dividends from the company, or they’ll look at the director’s salary and your share of net profit. It’s not the total company net profit, but your share as per your shareholding as a director.

How do I prove my income? What documents do I need to apply for a mortgage being self-employed?

Depending on which income route we’re using and your type of self-employment, it will be your tax year overviews with the corresponding SA302s. These show either your net profit or your director’s salary and dividend.

Then, the tax year overview shows the relevant tax being paid on that. That’s important. Make sure you’re paying the tax on your earnings, as the lenders will want to see that.

If you’re a limited company, lenders may also want to see copies of your limited company accounts, which need to be signed off by your accountant. If we’re using the director’s salary and share of net profit, obviously it won’t be the SA302s and tax year overviews the lender will work off, it will be the limited company accounts.

In some circumstances, lenders will actually just go for an accountant’s certificate. The accountant fills in a lender specific self-employed certificate, which asks questions about turnover, profit and your earnings from the company.

The right thing to do is speak to your advisor. We will discuss with you the different methods, your actual income situation and what you’re looking to borrow. We will advise which route is right to secure you a good deal.

We also advise which lender to apply to and what documentation will be needed. As a standard requirement, lenders are going to want at least three months worth of bank statements – your business bank statements – or for a sole trader, personal bank statements showing your current earnings.

Perhaps you’re not currently earning, even though a document may show that you earned money the previous year. You may have taken time off work and don’t have any funds going through the accounts at present – that would affect your ability to get a mortgage.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.