Self-Employed Mortgage

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

That’s quite a common misconception. We hear it often from self-employed applicants who contact us here at Thomas Nicholas. When you look online at the various different ways that lenders can assess your income, it can seem quite daunting.

But we deal with self-employed people very regularly. I would certainly advise anybody that is self-employed and looking for a mortgage to speak to a mortgage broker rather than going directly to a lender.

There are many different ways your income is treated, and different documents a lender may or may not ask for. A mortgage broker like ourselves will guide you through the process.

We’ll assess your income and let you know what would be affordable based upon our experience with self-employed clients.

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

Subject to income and credit scoring, the type of mortgage you get as a self-employed person is exactly the same as for an employed person. Lenders don’t have different products for the employed and self-employed.

But the type of information that lenders ask for will be different. Having that conversation early on in the process is really important, so that the advisor can put you with the correct lender.

Subject to having the necessary income and credit score, a 95% mortgage is as accessible for somebody who’s self-employed as anyone else.

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?

The vast majority of high street lenders would want you to have been trading for at least two full tax years as a self-employed applicant. Two or three lenders may consider a client if they’ve been self-employed for one year.

If you have been trading for one year, you can get a mortgage. It just means that the availability of lenders is quite restricted.

Speaking to somebody that fully understands self-employed income and how tax years work will help you understand whether you would be eligible for a mortgage at that time.

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

If your latest year’s figures are slightly lower than previous years, as a general rule the lender would only use that latest year. They wouldn’t use a higher average from previous years if the income has gone down slightly.

That may mean the amount you’re able to borrow would be slightly less, because it would reflect that most recent year.

In some circumstances, if there is a good reason for income being lower, a lender might be more flexible. If your business purchased machinery or a vehicle during the most recent year, for example, that might make a difference.

If it was simply because the business was not as profitable or not as busy, in most instances the lender would only look at the most recent year.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage if I’m self-employed?

The amount you can borrow is driven by the income from previous years, either based on your accounts or self-assessment tax returns. The calculation in the background is more in-depth than for somebody employed on a basic salary as shown on a pay slip.

In the current market in September 2024, you’re looking at between four to 4.5 times the profit figures we can extract from the previous years, in terms of how much you can borrow.

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

The deposit is the same as for an employed person. The lender doesn’t want more just because you’re self-employed, but the deposit can be influenced by your level of income and your credit score. Again, it’s useful to speak to an advisor that will look at the whole picture for you.

I’m not aware of any lenders that would look favourably on using a self-employment grant. We’re recording this in September 2024 and it’s not particularly relevant any more. Self-employed grants aren’t something we come across on a day-to-day basis now.

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

No, they don’t exist anymore, but they did when I started advising back in 2005. Effectively, you could decide you were going self-employed tomorrow as a window cleaner, and you could sign a piece of paper to say that you’re going to earn £45,000 in the coming year. The lender wouldn’t question that or ask for any evidence, and give you a mortgage.

You can see where that’s going. It led to some unsavoury scenes in 2008 and 2009 in the financial crash. Many of these mortgages then stopped performing, and people got into all sorts of problems with repossessions on loans they couldn’t afford. So self-cert has thankfully been resigned to the history books.

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

Similar to someone who is employed, we need to look at the income. If you’re a sole trader, we need to look at previous tax returns. If you’re a limited company director, we look at the company accounts for the last couple of years.

The advisor extracts the correct figures from those tax returns or accounts and runs them through with a lender. That will ascertain what you would be able to borrow as a self-employed mortgage applicant.

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

It will depend on whether you fall into the category of sole trader, partnership or limited company. For a sole trader and partnership, they’re looking at your tax returns for the last two, maybe three years. Very simply, that gives us the profit from self-employment or partnership.

If you are a limited company director, most lenders would again want to see your tax returns and your pay as a director. Usually you’ll have a salary and draw dividends. Your tax return would show the breakdown of salary and dividends. That’s how the majority of High Street lenders would assess a limited company director.

A few lenders would go a stage further to look at the company accounts to see whether there’s any retained profit within the business. Often, limited company directors don’t draw out all the available funds because they don’t need to, or they want to leave money within the business. Some lenders take that retained profit into account. So quite varying calculations are done.

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

Generally we would ask for tax calculation summaries, called SA302 documents, and tax year overviews, which is essentially the receipt you get once you’ve paid your tax bill and matches the SA302.

If you’re a limited company director, we generally want to see a copy of the latest year’s accounts so we can see how the business has performed, plus any retained profit. If you needed to look at borrowing extra money, we could use that.

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