Self-Employed Mortgage

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

It’s not necessarily harder, but it’s definitely different. If you’re employed, lenders can easily verify your income through payslips and a contract. If you’re self-employed, however, they need a bit more reassurance.

That usually means looking at your accounts, tax returns, and sometimes business bank statements to prove your income is stable. The key thing lenders want to see is consistency. If your income fluctuates a lot, or if you’ve only been trading for a short period of time, that can make things trickier.

But, if you’ve got two years of solid accounts and you keep your finances well-organised, getting a mortgage as a self-employed person is absolutely achievable. It just requires a bit more preparation.

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

You can usually access the exact same types of mortgages as anyone else, including a 95% mortgage. You can choose from fixed rates, tracker mortgages and even offset mortgages. The difference isn’t the product itself, it’s the way lenders assess your income.

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

Most lenders like to see at least two years of self-employed accounts. That gives them confidence that your income is stable and your business is suitable.

Two years is the sweet spot for most of these banks and lenders, but there are exceptions. It is possible with only one year’s accounts, but the options will be more limited. Some lenders will consider just a year’s records, especially if your previous work was in the same industry. But you’ll need strong evidence, solid accounts, good credit history and, ideally, a nice healthy deposit.

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

Yes, it could have an impact. Most lenders look at your last two years’ accounts and they often use the average income across that period. But if your most recent year is significantly lower, some lenders will take that as a sign of reduced sustainability.

In fact, a lot of lenders will base their decision on the latest year alone if it’s lower than the previous year. But the good news is that certain lenders will look at the bigger picture – they will ask why your income has dipped and whether it’s likely to recover.

How much can I borrow as a self-employed person? How many times my salary can I borrow for a mortgage as someone who is self-employed?

Generally, you can borrow about the same as an employed person. Most lenders use income multiples – and 4.5 times your annual income is the standard starting point. The key difference, however, is how the lenders calculate that income.

For the self-employed, they’ll look at the net profit of the business, or your salary plus dividends, sometimes as an average over two or three years. Some lenders cap the affordability at around five to 5.5 times your income, especially if you’ve got a strong background, a great credit score and low debts.

But it’s not just about the income. They also look at your expenses and commitments to decide on the overall affordability.

What mortgage deposit do I need if I’m self-employed?

The deposit requirements are the same whether you’re employed or self-employed. Most lenders ask for at least 5% of the property value.

If your income is harder to verify because you’re self-employed and your accounts show fluctuations, it may lead to lenders wanting bigger deposits of 10% to 15%. But usually the minimum is 5%.

What are self-certification mortgages? Do they still exist?

With a self-certification mortgage you didn’t have to prove your income with accounts or payslips. You simply declared what you earned and the lender took your word for it.

They were popular with self-employed people because they cut out the paperwork and got the job done very quickly. But it was also very risky. After the financial crisis, regulators essentially banned this. UK lenders now are much more sensible and these mortgages now don’t exist in the UK. Lenders today are really strict on the regulations.

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

When you apply as a self-employed applicant, lenders want to understand how much you earn and how stable that income is.

They’ll usually ask for two years of accounts or tax returns – sometimes it can be three. They’ll look at the net profits of the business if you’re a sole trader, or salary plus dividends if you run a limited company.

They’ll also check your credit history, your deposit and any existing debts. Some lenders will average your income over two or three years, while others focus on the most recent year.

Will IR35 affect my mortgage application?

IR35 itself doesn’t stop you getting a mortgage at all, but it can change how lenders view your income. If you’re inside IR35, you’re taxed like an employee, usually through an umbrella company or PAYE. That means your take-home pay might be a little lower, which can affect your affordability.

The good news is that many lenders will use your contract rate to calculate the income, not just your net pay. They’ll annualise your day rate, multiplying it by the number of working weeks you do to find your affordability.

Mainstream lenders might treat you like an employee and ask for payslips, or they might look at your company accounts.

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

Lenders will calculate your income based on the structure of your business. If you’re a sole trader, they’ll usually look at your net profit after expenses.

If you run a limited company, they’ll take either your salary plus dividends or retained net profits. Most lenders will average your income over the last two years, but if your most recent year is lower, they might use that figure instead.

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

As a self-employed applicant, proving your income is all about showing the lenders that your earnings are consistent and reliable. They’ll want official documents, not just what’s in your business bank account.

You’ll need to provide evidence like tax returns, certified accounts and sometimes business bank statements. Lenders want to see what you’ve declared to the HMRC, not just what you say you earn.

Most lenders ask for your last two years’ SA302s or tax calculations, your full accounts for the business and recent bank statements.

Key Takeaways:

• Most lenders prefer to see at least two years of self-employed accounts to ensure income stability, though some lenders may consider one year with strong evidence.
• Lenders will assess your income based on your business structure: net profit for sole traders, or salary plus dividends (or retained net profits) for limited companies.
• Generally, you can borrow about the same as an employed person, with a standard starting point of 4.5 times your annual income, which may be capped at 5 to 5.5 times for strong applicants.
• If your most recent year’s earnings were significantly lower than the previous year, some lenders may base their lending decision on that lower figure alone.
• To prove your income, you will need official documents such as your last two years’ SA302s or tax calculations, full business accounts, and recent business bank statements.

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

FOR SPECIALIST TAX ADVICE PLEASE REFER TO AN ACCOUNTANT OR TAX SPECIALIST.