Self-Employed With One Year’s Accounts
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Self-Employed With One Year’s Accounts
Charles Breen explains how to go about getting a mortgage if you are self-employed with just one year’s accounts.
What are the requirements for getting a mortgage as a self-employed individual with one year’s accounts?
It’s very similar to a standard mortgage. You need your bank statements, a reasonable credit score and credit history. You’ll also need one year’s accounts submitted to HMRC as a self-assessment, or, if you’re a limited company director, your full accounts submitted by your accountant.
What is acceptable proof of income for a self-employed mortgage applicant with one year of accounts? What documents do I need to gather?
Any self-employed applicant is a little bit off-piste from the standard, simple employed case. You definitely need everything to be prepared beforehand. That means three months’ personal bank statements, and lots of lenders want to see three months’ business bank statements to check that the business is still viable.
They’ll also want your photo ID and your accounts, all submitted to HMRC, and details of all taxes paid with nothing outstanding.
Doing your homework beforehand is key, as lenders will use different revenue streams depending on your self-employed status. If you’re a sole trader, a director or a contractor they’ll assess you differently. It’s really important to talk to your mortgage advisor early to get a gauge of what lenders will want and what you can achieve mortgage-wise.
Do self-employed individuals with one years of accounts have access to the same mortgage products as those with longer accounts?
Yes – you are not penalised at all if you’ve been self-employed for a year. All the rates are the same. It is just that only certain lenders will look at self-employed applicants with only one year’s accounts.
Also, the level of underwriting and the deposit that they look for change, because you’re seen as a larger risk of potentially defaulting.
What steps can I take as a self-employed individual to increase my chances of securing a mortgage with one year of accounts?
Make sure you have as large a deposit as possible. With a 5% deposit it’s going to be harder to get a mortgage as self-employed with a year’s accounts than if you had a 10% deposit. It’s not out of the realms of possibility, it’s just a bigger mountain to climb. A good credit score is going to be vital, because you have only just become self-employed.
A lot of the time, they’ll want to see that you’ve gone from a similar industry. Let’s say you were working in an estate agency and you’ve become a self-employed estate agent. Having a record in that industry makes it viable. You haven’t gone from being a teacher to self-employment in a completely new industry.
Make sure that no taxes are outstanding and that your accounts are submitted, not just draft versions. Full versions need to have gone to HMRC.
How do lenders assess the affordability of a mortgage for self-employed individuals with one year of accounts?
Self-employment covers a lot of different subsections such as contractors, sole traders and limited company directors – and lenders will assess all of those differently. If you’re a contractor, some of them will take you on your day rate. Others will take you on what your self-assessment says.
If you’re a sole trader, it would be based on your profits from your self-assessment. If you’re a limited company, some lenders will take profit before tax, or dividends and salary, while some will take profit after taxation.
They’ll use a different combination of all of those four figures to work out your affordability. So it does vary a lot depending on your self-employed status.
Are self certification mortgages available for self-employed individuals with a year’s accounts?
No. Self-certified mortgages haven’t been around since about 2009 when the mortgage lending rules changed. They became much more onerous and there was a greater emphasis on proving people’s income.
Even if you’ve been self-employed for 15 years, you won’t be able to get a self-certification mortgage any longer. They don’t exist.
What interest rates can I expect as a self-employed mortgage applicant with one year’s accounts?
It will be the same as for someone who’s employed.. There’s no special interest rate for the self-employed. Lenders are just more diligent about underwriting and the criteria that they seek. The interest rate they charge you on a monthly basis is exactly the same.
Are there any specific mortgage lenders or financial institutions that specialise in mortgages to self-employed individuals with one year’s accounts?
It’s changing all the time, because lenders adapt their criteria – especially at the moment. They are trying to broaden their catch of clients because mortgage lending is down [podcast recorded December 2023].
There are specific lenders who will do it. The majority don’t accept one year’s accounts for the self-employed, but specific lenders will. A broker will give you advice on those lenders and find you a suitable deal.
Are there any additional criteria or considerations that self-employed individuals with one year’s accounts should be aware of when applying for a mortgage?
A key thing is having experience in your industry. They don’t want you going in head first in a new industry. They want to make sure that you have a track record so that it’s more viable for you to maintain profitability and be able to pay the mortgage.
Credit score is quite high on the list of things they look for, too. If you’re self-employed they will be a bit more diligent on any credit issues that you’ve had in the past. They will look at your business bank statements as well to make sure that the business is a going concern. They’re checking that you didn’t just have one really good year and then income dropped off.
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How long does the mortgage application process usually take for self-employed individuals with one year of accounts?
It varies, but it is a bit more onerous and slightly slower. Some lenders have specialist underwriting teams dedicated to self-employed applicants, who go into more detail – so it is a slower process.
If, for example, a standard employed mortgage would take four four weeks, a self employed mortgage might take six. It just is a little bit slower, but nothing drastic, especially if you have a good mortgage advisor who will place you with the right lender first time.
Is it beneficial to work with a mortgage adviser or broker when applying for a mortgage as a self-employed individual with one year of accounts?
Yes, definitely. The alternative is you going from bank to bank, wasting hours of your own time. It will take an hour long appointment with each bank just to see if you’re eligible or not.
But if you go to a mortgage advisor, we’ll be able to tell you within 15 minutes if this is going to be feasible or not. We can do all that groundwork and get you a selection of lenders. I work with about 100 different providers, so you have more choice, access to a greater variety of rates plus expert knowledge.
There’s a reason you don’t service your own car – you take it to the mechanic. So there is definitely a benefit to going to an advisor, in my opinion.
Can I apply for a joint mortgage with a partner who has regular income even if I’m self-employed with one year of accounts?
Yes, you can. If anything, having a fellow applicant who is employed will make it a little bit easier. They’ll be able to prop up the case and reassure the underwriter.
It will all depend on placing the case with the correct lender, where you meet the criteria. Your mortgage adviser would discuss this with you.
Are there any specific challenges or risks that self-employed individuals face when applying for a mortgage with one year of accounts?
There are a lot if you don’t do your groundwork and get prepared beforehand. If you’re mortgage ready, there’s no big risk to you. Once your accounts are in order, the broker’s done their research, the deposit is all ready, your credit score is all good and the Decision in Principle has been done beforehand, it should go fine.
You are subject to greater underwriting, but beyond that it’s very similar to a standard case. They’re not allowed to penalise you because you’re self-employed, but they are allowed to restrict their criteria..
What happens if my one year of accounts show low or fluctuating income – can I still qualify for a mortgage?
It’s not uncommon for income to fluctuate. Perhaps it’s a seasonal industry and you have a brilliant December, then your income tapers. You could get a mortgage, but you would have to share your trading history and 12 months of business bank statements to show that seasonal fluctuation.
It would then be up to the underwriter. Perhaps a client is a musician who plays for six months and takes six months off. The lender might be willing to lend to them based on one year’s accounts, especially if they previously were doing it as an employee and are now self-employed.
They just want to see that track record. Again, do your research and groundwork beforehand. Your mortgage advisor will speak to their contacts with the lenders and get them to confirm they would consider that fluctuating income from the start.
What impact does credit history have on the mortgage application process for self-employed individuals with one year of accounts?
With any application, a lot of it is based on your credit score. The lender is looking at what you did financially in the past because it gives them an indication of what will happen in the future.
If you’re self-employed with one year’s accounts, your income is more varied and can be a larger risk to them. So they will want you to have a better credit score or greater deposit to counteract that risk.
If you have a bad credit score and with lots of CCJs, it’s going to be harder to place you with a lender, but having a large deposit will counteract that. Go to an advisor and get a Decision and Principle done early. The advisor will check your credit report and give you specific advice for your situation.
Are there any government schemes or support available to help self-employed individuals with one year of accounts get a mortgage?
As most self-employed people know, there is no support from the government in anything we do. So no, there’s no real support other than the mortgage guarantee scheme which just backs the lenders to offer mortgages at 95% loan to value.
Are there any alternatives to traditional mortgages that may suit self-employed individuals with one year’s accounts?
You have shared ownership, which is a good solution. That’s where you buy a portion of the property rather than the whole thing outright. You buy a portion with a mortgage, let’s say 50%, and you pay rent on the other 50%.
It helps if you’re struggling for affordability, because in the first year of being self-employed, you have lots of costs. Your accounts don’t always look so healthy and the profit isn’t as high as you would wish for. So it’s a brilliant way to step on the property ladder.
The other solution is a guarantor mortgage. A family member could either boost your income and go on the mortgage with you, or they may guarantee some of the deposit equity towards the new property. You’re therefore having to borrow a reduced amount.
Can I use additional sources of income such as rental income from properties or dividends when applying for a mortgage as a self-employed individual with one year of accounts?
Yes, you can, as long as you’re able to prove each form of income. If you have a rental property, you could use that income – as long as you’ve completed your SA302 self-assessment for that rental profit.
If you have another company in the background, you could use that as well – again it needs to have been trading for at least one year. You could use maintenance income and government benefits such as child benefit.
We have specialist software where we key in all of your different revenue streams. It sends the information off to the lender’s own affordability calculators and gives us an exact figure of how much you can borrow – employed or self-employed. The more revenue streams you declare to us and we can prove, the more we potentially can get for you as a mortgage.
Is it possible to make overpayments or pay off a mortgage earlier as a self-employed individual with one year of accounts?
Yes. If you have excess money on a monthly basis, you can overpay your mortgage by 10% of the outstanding balance. That’s typical. Some lenders will even let you overpay by 20%, although I’ve never met someone who’s done that, other than with inheritance.
But if you’re able to overpay, fantastic. If you want to pay off the entire mortgage early, you can, but look at your mortgage product to see if there would be any penalties. Speak to your advisor to plan the best way of doing without any early repayment charges.
Your home may be repossessed if you do not keep up with your mortgage repayments.