There are around 4.4 million people who are self-employed in the UK. The self-employed are often described as the backbone of our economy, and rightly so. Whilst there are many perks to being self-employed, having an easy time when it comes to getting a mortgage is not always one of them.
But the good news is that it’s certainly possible, and this extensive guide will let you know all you need to know about securing a mortgage as a self-employed person.
Can I get a mortgage as a self-employed person?
Yes. It’s certainly possible to get a mortgage as a self-employed person. The mortgages available are generally the same as for employed people; however, they are often required to evidence a longer track history of earnings. Self-employed people often run their businesses in a tax-efficient way, which is great for tax planning but can cause issues when it comes to getting a mortgage.
What counts as self-employed?
If you own more than 20-25% of a business, you will generally be treated as self-employed for mortgage purposes. This is because you have a significant stake in the business and are likely to have control over its operations and finances.
Additionally, if your income is not subject to tax deducted at source and you submit an annual tax return, you may also be considered self-employed for mortgage purposes.
Types of self-employed
Being self-employed in the eyes of mortgage lenders can take many forms. Below are the most common self-employed setups.
- Contractors: These are individuals who work on a project basis and are not employed directly by a company.
- Freelancers: These are individuals who work for themselves and offer services to clients on a project basis.
- Sole Traders: These are self-employed individuals who run their own businesses and are personally responsible for their liabilities.
- Limited Liability Partnerships (LLPs): These are business partnerships where each partner has limited liability for the debts of the business.
- Limited Companies: These are businesses that are separate legal entities from their owners, who are not personally liable for the debts of the company.
Can I self-certify my mortgage?
Self-certification mortgages were a type of mortgage where borrowers could declare their income without providing any evidence or documentation to support their claim.
However, after the 2008 financial crisis, it was found that these types of mortgages had contributed to the housing bubble and subsequent collapse, as many borrowers had overstated their income or financial status.
As a result, self-certification mortgages were banned, and lenders are now required to fully verify and evidence a borrower’s income and financial status before approving a mortgage application.
Do I need an accountant?
While it’s not essential to have an accountant if you’re self-employed to get a mortgage, working with an accountant can help boost your chances of success, especially if you’ve had a sharp increase in income or a turbulent few years of trading history.
If you’re self-employed, lenders will typically look at your trading history and income over the past few years to determine your ability to repay the mortgage. However, if your income has increased rapidly or your trading history is less stable, a lender may require additional support from your accountant to confirm your income sustainability.
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How long do you need to be self-employed to get a mortgage?
While it may be possible for some contractors who work on an employed basis to get a mortgage with only a few months of trading history, in general, mortgage lenders will require at least two to three years of trading history before considering a mortgage application from a self-employed individual.
Having a longer track record of trading history can help lenders assess your income stability and ability to repay the mortgage. However, there are some lenders who may consider self-employed individuals with less than two years of trading history, particularly if you have a strong credit score and income history prior to becoming self-employed.
Some lenders may also consider individuals who have been self-employed for just one year or even less, but this will depend on various factors such as the nature of the business, the industry you work in, and your overall financial situation.
Less than 1 year
If you have been self-employed for less than one year, it can be a challenge to secure a mortgage as most lenders require a minimum of two to three years of trading history. However, some lenders may consider your application if you can provide evidence of a stable income and good credit score.
If you have transitioned from an employed role to a self-employed role in the same line of work, some lenders may consider your previous employment history as evidence of income stability, although this will depend on the lender’s specific criteria and lending policies.
For contractors, some lenders may require less employment history than for other types of self-employed individuals, such as sole traders, freelancers, or company directors, as contractors often have fixed-term contracts and a higher degree of income stability.
1 year
If you have one year of accounts as a self-employed individual, it may be possible to secure a mortgage, although this will depend on the lender’s specific criteria and lending policies.
In general, specialist lenders may be more willing to consider self-employed individuals with only one year of accounts, while mainstream lenders may require a longer track record of trading history before considering an application.
Having a track record of working in the same line of work can also help your application, as it provides evidence of income stability and experience in the industry.
2- 3 years +
Most mortgage lenders require a minimum of 2-3 years of trading history for self-employed individuals and will typically take an average of your income over the last 2-3 years to assess your affordability for a mortgage.
Having a longer trading history can also help to strengthen your application, as it provides a more detailed and comprehensive picture of your income and financial stability as a self-employed individual.
What type of income is used?
The types of income that can be accepted for the self-employed can vary depending on their employment type and the lender’s requirements. Freelancers and sole traders typically use their net profits as their income, which is calculated by subtracting their business expenses from their total revenue.
On the other hand, company directors can use their salary and dividend payments as their income. Some mortgage providers may accept company director’s salary and net profit.
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How much can self-employed people borrow?
The amount that a self-employed person can borrow will depend on their individual circumstances, including their income, expenses, credit history, and the lender’s requirements.
As a general rule of thumb, lenders may consider offering loans up to 4.5 times the borrower’s income. However, this can vary significantly depending on the lender and the borrower’s specific financial situation.
For self-employed individuals with higher incomes, some lenders may consider offering higher income multiples, such as 5.5 times their income.
Gross or net profit?
Mortgage lenders typically use the net profit of self-employed individuals as the basis for determining their income. Net profit is calculated by subtracting business expenses from the total revenue, but before taxes are deducted. This is the income that a self-employed individual is left with after deducting their business expenses, and is therefore seen as a more accurate representation of their income than their gross revenue.
However, for company directors who receive income through a combination of salary, dividends, and profits, some lenders may use the income after corporation tax has been deducted, rather than the net profit before taxes.
This is because the corporation tax is deducted from the company’s profits before the income is distributed to the directors, so using the income after corporation tax provides a more accurate picture of the director’s personal income.
Salary/dividends or retained profit
While most mortgage lenders consider salary and dividends as income for company directors, this may not always be a true reflection of the director’s earning potential, as some company owners may only withdraw what they need in salary and dividends and leave the rest of the profits in the company, which is called retained profits.
Retained profits are essentially the earnings that the company has made but not distributed to the owners or shareholders. Some lenders may consider retained profits as part of the director’s income, which can make a significant difference in the amount they can borrow.
For example, in the scenario you mentioned where a company owner earns a profit of £100,000 but only draws a salary and dividends of £50,000, some lenders may consider the full £100,000 profit as income, which can increase their borrowing potential.
What if I’ve switched from a sole trader to a limited company?
If you were previously a sole trader and have recently incorporated as a limited company, this can impact your eligibility for a mortgage and the documentation required to support your application. Some lenders may be okay with this change in employment type, while others may require you to have been operating as a limited company for a certain period of time, usually 1 to 2 years, before they will consider you for a mortgage.
It’s important to ensure that you are applying with the right lender who understands the unique circumstances of self-employed individuals and is willing to consider your specific situation.
What income proof is required for self-employed mortgage applications?
The income documents required for self-employed individuals applying for a mortgage may vary depending on their employment type (i.e. sole trader, freelancer, company director, contractor) and the requirements of the lender.
However, some common income documents that are typically required include:
- Tax returns: Self-employed individuals will typically need to provide copies of their tax returns for the previous 2-3 years to verify their income.
- SA302 forms: These are documents issued by HM Revenue and Customs that provide evidence of your income and tax paid.
- Business accounts: Self-employed individuals may be asked to provide their business accounts to verify their income. This could include profit and loss statements, balance sheets, and cash flow statements.
- Invoices: Freelancers and contractors may be asked to provide invoices or contracts to verify their income.
- Bank statements: Lenders may ask for bank statements to verify income and to assess spending habits.
- P60s: Company directors may need to provide P60s as evidence of their income.
- Dividend vouchers: Company directors may also need to provide dividend vouchers to evidence any income received through dividends.
It’s important to note that the specific income documents required may vary depending on the lender and the specific circumstances of your application.
Best lenders for self-employed mortgages
There are many mortgage lenders in the UK who offer products specifically tailored for the self-employed.
Some of the best mortgage lenders for self-employed include:
- Coventry Building Society: Coventry is known for being one of the more flexible lenders when it comes to self-employed applicants. They may consider the latest year’s accounts, and they may also be willing to consider applicants with just one year of accounts in certain circumstances.
- Precise Mortgages: Precise is another lender that is known for being flexible when it comes to self-employed applicants. They may consider the latest year’s accounts, and they also offer products specifically tailored for self-employed individuals who have recently started their own business.
- Halifax: Halifax is one of the largest mortgage lenders in the UK, and they offer a range of products specifically for self-employed individuals. They may consider applications based on just one year of accounts in certain circumstances.
- Aldermore: Aldermore is a specialist lender that offers products specifically for self-employed individuals. They may consider applications based on just one year of accounts in certain circumstances.
Deposit required for self-employed mortgages
The deposit requirements for a self-employed mortgage are generally the same as those for an employed person’s mortgage. The deposit required will depend on various factors, such as the lender’s lending criteria, the type of property being purchased, and the borrower’s individual circumstances.
However, it is possible for the self-employed to obtain a mortgage with as little as a 5% deposit, although this may be subject to higher interest rates and stricter lending criteria.
Can I get a mortgage if in self-employed with bad credit?
Yes, It is possible to get a mortgage with bad credit if you are self-employed, but it may be more challenging compared to getting a mortgage with bad credit as an employed person. Self-employed people with bad credit may have fewer options and may be subject to stricter lending criteria from lenders.
It’s important to note that obtaining a mortgage with bad credit may also mean higher interest rates, larger deposits, or other unfavourable terms.
What rates are available to self-employed?
The rates available to self-employed applicants are generally the same as those available to employed borrowers. However, self-employed borrowers may be subject to stricter lending criteria and documentation requirements.
How to boost your chances of getting a mortgage when you’re self-employed
- Have an accountant: Working with an accountant can help you to manage your finances more effectively, and they can also provide financial statements and tax returns that lenders will require when applying for a mortgage.
- Be prepared: Lenders will want to see documentation that proves your income, so it’s important to have all necessary financial statements, tax returns, and bank statements ready in advance.
- Consider impacts of only paying yourself a minimum income for tax reasons: If you pay yourself a minimum income for tax reasons, this may affect your ability to get a mortgage as lenders will be looking at your net income to determine affordability. It’s important to strike a balance between minimizing tax liability and ensuring that you have enough income to meet mortgage affordability criteria.
- Pay taxes on time: Late or missed tax payments can negatively impact your credit score and make it harder to get approved for a mortgage.
- Keep business bank account looking healthy and cash reserves: Lenders will want to see evidence of financial stability and ability to make mortgage payments on time, so it’s important to keep your business bank account in good standing and maintain adequate cash reserves. This will also help to demonstrate that you are a reliable borrower.
What if I can’t borrow enough?
If you’re unable to secure a mortgage at the level you require based on your self-employed income, here are a few suggestions that may help you bridge the gap.
- Joint Mortgage with friend or family: You could consider applying for a joint mortgage with a friend or family member who has a regular income to increase your affordability.
- Joint borrower sole proprietor: Some lenders offer a joint borrower sole proprietor mortgage, which allows you to apply for a mortgage with someone who has a regular income while remaining the sole owner of the property.
- Guarantor: You could also consider getting a guarantor for your mortgage. This is someone who agrees to make the repayments on your behalf if you are unable to do so.
- Government Scheme: There are various government schemes that can help self-employed individuals get on the property ladder, such as the First Homes scheme or Shared Ownership.
- Save for more deposit: If you can’t get a mortgage with your current income, consider saving more for a larger deposit. This will reduce the size of the mortgage you need and increase your chances of being approved.
How can Strive help?
The world of self-employed mortgages can be quite confusing at times. Having a mortgage broker with experience arranging mortgages for the self-employed can really help your chances of success with your application and help ensure you find the most suitable deal.
For more info on self-employed mortgages, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.