Get In Touch
Charles Breen talks us through the mortgage process for the self-employed and shares some tips.
Why does being self-employed make mortgages difficult?
Lenders still view self employment less favourably than being salaried. They will use an average of your income over the last two years of accounts to mitigate some of their risk.
They’re looking at a two-year track record – whereas if you were employed they would just look at the past three months, so that’s one way it’s harder.
Lenders also underwrite you to a higher degree than a salaried applicant. It’s again to minimise risks on their side. They will look at your net profit, dividends and different streams of income. So it is a bit harder as a self-employed applicant when going for a mortgage, but a broker is here to help.
What counts as self-employed and what type of mortgage can I get if I am self-employed?
Lenders will count you as self-employed if you own more than 20% of a business and it’s your main source of your income. You will need to provide up to two to three years evidence of your self-employed income.
If you’re a sole trader or part of a partnership, you will also be categorised as self-employed for a mortgage.
You are able to get any standard mortgages. It is just that the underwriting and proving your affordability is more complex. Rates aren’t any higher just because you’re self-employed, but each lender might treat you differently and have different criteria in the underwriting and affordability process.
How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year’s worth of accounts?
The standard is two years accounts, but some lenders will do it on one year’s records – so it is possible to get a mortgage if you’ve only been self-employed for a year. But that will limit drastically the choice of lenders and products that you will have, as well as the interest rates available. You might end up with a lender that has a slightly higher interest rate.
High street lenders, especially, still want two years accounts, but it is possible to do it with 12 months’ trading history.
My most recent year’s earnings were less than average – will this affect my mortgage application?
The majority of lenders will either take an average of the last two years, or if profit is decreasing, they will take the lowest year. So if you were on £50,000 two years ago and you’re down to £30,000 this year, they will use the £30,000 as your income.
Some lenders will use an accountant’s certificate to back up and build the case but as standard, if it’s decreasing they’ll take the lowest years accounts. It affects your affordability rather than your ability to get a mortgage.
How much can you borrow as a self-employed person?
In principle, your employment status shouldn’t affect how much you can borrow. It still should be around four and a half times your annual income, on average.
Lenders will always mitigate to reduce their risks, so they might use different income streams or net profit before tax divide rather than salary. But as a guide, you can often get around four and a half times your income.
Can I get a 95% mortgage if I’m self-employed?
Typically it’s a 10% deposit, so a 90% mortgage. But since the government launched the mortgage guarantee scheme back in 2021, it’s possible for credit worthy clients to obtain a 95% mortgage.
That’s regardless of your employment status – but do bear in mind that does mean that there’s a higher interest rate. But yes, you can get a 95% mortgage if you’re self-employed.
What mortgage deposit do I need if I’m self-employed? Can I use my self employment grant as a deposit?
It depends on the lender you go to. Some might accept deposit sources from grants, but the majority of them will not. When it comes to your deposit, they will always want to see where it came from, so make sure it’s nothing that has to be repaid at any point or has any caveats attached to it.
What proof of earnings do I need for a mortgage if I’m self-employed?
If you’re a sole trader you will need what’s called your SA302s – that’s your tax calculations and tax overview forms. These will show the lender your income. If you’re in a partnership, you will also be treated as a sole trader and lenders will want to know your share of profits. They’ll calculate your earnings based on that.
If you’re a limited company, lenders will accept the salary and dividends you’ve taken from the company. Some will also look at the company’s accounts, depending on your shareholding in the company, and potentially use the gross or net profit figure.
What are self certification mortgages and do they still exist?
They existed in the early 2000s, but after the financial crash in 2008 they were banned, because they were being abused. Lenders will not allow you to self-certify, and there are lots of checks and balances now around proving your income and sustainability.
A lot of self-certified clients turned out not to be able to manage the mortgages they took out. But there are plenty of other options if you’re self-employed. Mortgage brokers like myself are here to give you the expert advice you need.
How will I be assessed as a self-employed mortgage applicant?
Just as for every other applicant, the lender will look at your documents, ID, bank statements, income and credit score. They will go through your case like any other.
You will often be seen by specialist underwriters. Certain banks like HSBC have dedicated teams for self-employed applicants. For these, you need your accounts to be in order and submitted – they won’t want to see any outstanding taxes owed or any issues in the background.
It can often be worth worthwhile paying off any debts before applying for a mortgage and getting your finances in order. But in general, you’re treated similarly to a standard applicant. It is just that there is more onus on proving your income than if you are a PAYE applicant.
Will IR35 affect my mortgage application?
Every mortgage lender will look at you and determine if you fit their criteria or not. Even though IR35 is quite a hot topic, most lenders are currently not really concerned about this change.
Many will treat the affordability as normal, whereas some will deem you as an employee and others will treat you as self-employed. If you’re concerned, speak to an expert to understand if it is going to affect you.
How will a lender calculate my self-employed mortgage earnings?
It depends on your self-employed status – whether you’re a contractor, a sole trader, in a partnership or a limited company director. If you are a partner or sole trader they’ll take the SA302 income figure. If you are the director of a company they’ll look at remunerations, which is your dividends, net profit and gross profit – or a mixture of those figures.
We use specialist software to input all that data, which sends all of that information off to the lender’s own affordability calculators and gives us a spot-on figure. We’re able to tell you with certainty how much you will be able to borrow.
That’s why you should engage with a mortgage advisor early on, so we can help you plan how much you can borrow and the next steps.
Speak To an Expert
What will I need to provide for a self-employed mortgage and what documents do I need?
You need the standard ID and business bank statements – the lender will want to see that the business is still viable. They’ll check that money is coming in and it’s at sustainable levels. That will help to prove the income that you’re declaring.
Then, they’ll want to look at your last two years’ accounts, or if you’re a new business with one year’s accounts they will often want an accountant certificate. This is a special letter from your accountant to confirm your figures and that they see no issues with future trading.
You also need those self-employed documents: your SA302 and tax year overview are the key ones.
It helps to have all these things to hand, and aim to seek advice early so you can get everything ready. You don’t want to be putting in an offer on a house and rushing to get all of your documents together. Estate agents don’t have time for that. They want someone who’s ready to go and purchase that property.
Do self-employed people have to pay higher mortgage rates?
No. You’ll get a standard rate from any lender. They don’t have specialist self-employed products. If you’ve only had one year’s trading, you’re limiting yourself to certain lenders which means you don’t have the same choice.
Generally, if you’re self-employed they don’t penalise you with higher interest rates. Once you meet their criteria and affordability, you’ll have access to standard interest rates and products.
Can I get a joint mortgage with a self-employed worker?
Yes, it doesn’t really affect anything. You’ll still be assessed the exact same way if you’re a single applicant or if you’re a joint applicant. It just means there’s going to be a more onerous underwriting process on the entire application.
It might take a little bit longer before you get a mortgage offer, but apart from that it’s the same. Again, do your homework beforehand and get advice in advance to make it smoother.
What else can I do to help my chances of getting a self employed mortgage?
It’s all about making sure that your credit is as good as possible and you have your deposit ready. Make sure your accounts are all submitted and that your bank statements are nice and clean, with no crazy transactions going in and out.
Make sure that you’re on the electoral roll and all of your bills are up to date. Try to minimise the use of credit facilities. If you have a credit card, aim to use less than 50% of it. Don’t go into your overdraft and don’t take out any new credit agreements just before you submit a mortgage.
It is very similar for people who are employed or self-employed. The only difference is that it might take a little bit longer, so preparation is key. Talk to your accountant beforehand to make sure that everything is up to date and submitted, they can also have all the documents ready for you when you’re submitting.
I’ve recently gone from being employed to self-employed. How soon until I can get a mortgage?
Once you have your first year’s accounts, you can potentially get a mortgage. With just a year’s accounts, more stringent checks will be done on you. You’ll need a good credit score. It may limit your affordability slightly and reduce the lenders you can choose from, but it can all be done with a year’s submitted accounts.
Can I get a guarantor mortgage if I’m self-employed?
It wouldn’t matter if you’re self-employed or employed. You can have a guarantor mortgage as long as you can prove your income and both you and the guarantor meets the lenders criteria.
Can I use shared ownership if I’m self-employed?
Yes, you can use shared ownership. A shared ownership mortgage is exactly the same as a standard mortgage. You’d still need to prove your income and meet lender criteria. The property also needs to meet their criteria.
It can be a bit challenging to find a shared ownership lender that will accept the self-employed, but it is possible. It also depends a little on the deposit you’re putting down. Again, a broker will be able to find the most suitable lender for you.
Can I get a Buy to Let mortgage if I’m self-employed?
It’s pretty standard and straightforward if you’re self-employed to get a Buy to Let mortgage. As long as you’ve got a good decent deposit saved and the rental income from that property will be able to sustain that mortgage, there should be no issues.
Getting a Buy to Let mortgage just takes a bit more research, planning and preparation from you and your advisor.
How does remortgaging work if I’m self-employed?
You can get a remortgage if you’re self-employed, even if you were employed when you took out your original mortgage. The same checks and balances are carried out, and there is the same scrutiny around affordability.
Possibly, if you’ve just only done one year of self-employment and your mortgage deal is ending, it may be best to do a product transfer with your current lender. You can then in the future go on the open market to find a lender with your two or three years’ accounts at that point.
But plenty of lenders deal with the self-employed. For a remortgage, it does depend on your Loan to Value as well, but we can help you look at the options.
Will being self-employed with bad credit affect my mortgage deposit?
If you have a history of bad credit on top of being self-employed, you will probably be asked to put down a bigger deposit. This just minimises risk to the lender, because it means there’s less risk of negative equity. It allows them to give you a better interest rate.
There are plenty of specialist mortgage lenders who look at people who are self-employed. Some of them aren’t available directly to you – they’re only available via intermediaries like mortgage advisors. They typically work with us to help get you the best deal possible.
So finding a lender who does deal with both bad credit and self-employment is more than possible. It just takes a little bit of skill and expertise.
How can I get a mortgage as the director of a limited company?
It can often seem daunting and stressful, especially when you’re busy running a company. There are a lot of myths about being self-employed and struggling to get a mortgage. But in fact, there are plenty of lenders who deal with limited company directors.
It’s much simpler if you make time for preparation: dealing with a mortgage professional early on, doing your research and getting all your documents ready. It can make the process so much easier because you have everything lined up.
You need to prove your affordability and meet the lender’s credit score criteria, but that’s why you would engage a professional – we will go through it all at the start. We carry out full assessments of your documents and have everything prepared before you start your property search or you start the remortgage process.
We produce all the paperwork for the application so it will go as smoothly as possible.
What top tips do you have for a Self-Employed individual looking to apply for a mortgage?
As part of this it may be worth checking your credit report to ensure that you are in a good place financially.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up with your mortgage repayments.
You may have to pay an early repayment charge to your existing lender if you remortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.