Self-Employed Mortgages
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Self-Employed Mortgages (Part 1)
Josh Rankin explains how the mortgage process works if you are self-employed in episode one of two, recorded in October 2024.
Is it hard to get a mortgage if you are self-employed?
I think there is a feeling in the market that it’s very difficult to get a mortgage if you are self-employed. But it depends. The tricky part is that you need at least a year’s records to evidence your income.
Aside from that, it’s got a lot easier. Lenders are more understanding now, so it doesn’t necessarily need to be more difficult, assuming you have at least one year’s experience.
What type of mortgage can I get if I’m self-employed? Can I get a 95% self-employed mortgage?
Most lenders offer the same products whether you’re employed or self-employed. There’s still a good number of providers who can offer you a 95% mortgage if you’re self-employed.
There was a slight adjustment with this around Covid times, when that became a lot more difficult. Some clients may still have that mindset from advice they had a few years ago.
A lot of lenders have returned to the 95% Loan to Value market, where you just need a 5% deposit. You are pretty much able to get the same mortgages as an employed person.
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?
This is one of the main issues for people that are newly self-employed – the need to have a minimum of one year’s records. You need to have processed a full set of accounts to show the lender.
Typically we need a tax calculation and tax year overview, and if you’re a limited company, lenders may want to see the company accounts. They want to make sure that everything’s running smoothly at the moment and it’s been consistent over the last year. A number of lenders that will be very comfortable to lend with just one year of accounts.
My most recent year’s earnings were less than my average. Will this affect my mortgage application?
This can vary from lender to lender. The majority will use an average of the last two years, but if the latest year is lower they typically just use that, as a ‘worst case scenario’ in case things don’t return back to the ‘average’ year.
A handful of lenders can take a view on it with a more manual underwriting approach . They look at the details on a case-by-case basis.
But if you want access to the whole market with competitive rates, a slight dip in your latest years’ figures would have an impact.
How much can I borrow as a self-employed person? How many times my self-employed salary can I borrow for a mortgage?
You can usually borrow anywhere between four and six times your salary, depending on how much income there is, your overall situation and what deposit you’re looking to put down.
All those things are factored in to determine which bracket you fall into. The standard is somewhere around four and a half times your income.
If you’re a sole trader that would typically be based on your net profit, and if you’re a limited company it would typically be your salary and dividends – although a handful of lenders will look at salary and net profit.
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What mortgage deposit do I need if I’m self-employed? Can I use my self-employment grant as a deposit?
The minimum deposit is generally 5%. You can use a gift of money from a family member as your deposit – it doesn’t necessarily have to come from your own savings.
On the self-employment grant, this will vary from lender to lender. There are a few unusual schemes that allow a lower deposit, so it would be possible, but that’s going to limit which lenders we could look at.
What are self-certification mortgages and do they still exist?
Essentially, these were mortgages where lenders would take the client’s word for how much income they earned. They would never ask for proof. These mortgages ended officially in 2014 when there was a big overhaul to the mortgage market.
Since then, lenders have had a duty of care to make sure clients aren’t taking on more than they can afford. That led to today’s requirement to provide proof of what you’re earning. Although it can seem annoying to clients who want to stretch that budget, it certainly makes sense in terms of protecting them for the future.
How will you be assessed for a self-employed mortgage application?
The main thing is working out if you’re a sole trader or a limited company, and if you’re a partner, working out what percentage share you have in the business.
For a sole trader it’s very simple. We just need a tax calculation and a tax year overview. Lenders just look at your net profit, and assuming the bank accounts are all looking steady, it’s pretty straightforward.
The limited company route gets slightly more complex, with most lenders wanting to use your salary and your dividends. A handful are happy to use salary and your net profits. That works well for clients who’ve had really good profit, but for tax purposes are not drawing all of the money out in dividends.
Banks can be more lenient with that. Their view is that you’ve got the money sitting in the business and it’s available for you to take – you just chose not to.
It will hinge on your share percentage. So if you only owned 30% of the business, you can’t use 100% of those net profits – so there are some caveats. But it does mean we can be clever in how we present cases to push that affordability up.
Will IR35 affect my mortgage application?
It can. Some lenders are changing the way they look at it. A lot of them will assess your borrowing as if you’re employed, but it will depend on the level of income, where the tax is paid and what proof you can provide.
If a lender can’t treat you as employed, it will normally fall under contractor assessment, where your borrowing is calculated based on your day rate. That’s normally worked out as an annualised figure, and the assessment of that varies from lender to lender.
A handful of lenders will assess you as self-employed, which could lower your affordability expectations. But again, it depends on how tax is deducted.
How will a lender calculate my self-employed mortgage earnings?
For a sole trader, they will look at your net profit. If you’ve just got a year’s accounts and we’re going to a suitable lender, they would just use that. If we’ve got two years or more, they will take an average – or if the latest is lower, they typically use the lower of the two.
With a limited company, they want to see the accounts. They can potentially use net profit. Again, it’s the same structure – they look at the last two years and use an average, or the latest year if it’s lower.
How do I prove my income and what documents do I need to apply for a mortgage as someone who is self-employed?
Often clients we speak with haven’t processed their latest accounts yet. We do need that to see what the numbers look like – it can have a big impact on affordability. A difference of £4,000 on your accounts could make all the difference in whether or not you can borrow the amount you want.
I would always recommend having your accountant on board, or if you’re doing it yourself, to have them filed and fully complete. Lenders can’t use draft copies or an accountant’s letter. They want to see the official submitted accounts.
Typically we need to see three months’ business bank statements showing the income and at least two years’ tax year overviews and tax year calculations – or company accounts if we’re looking at the limited company route.
What else do we need to know about self-employed mortgages?
The majority of questions we have from clients are around what income will be looked at under the microscope and factored in for affordability. A mortgage broker will be able to explain in detail how much you can borrow and what lenders will require from you.
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