Is it harder to get a mortgage when you’re self-employed?

I wouldn’t say it’s harder to get a mortgage if you’re self-employed, but it’s less straightforward than for an employed person. You’ll find that lenders will ask you for more documentation. They’re potentially going to look at your income a little bit more closely, compared with an employed person who will just have to provide payslips and maybe some bank statements.

One of the outcomes of Covid last year was that it took a while for mortgage providers to start lending to more self-employed clients. There were minimum deposit restrictions in place. Some lenders still have these – they will ask for a 25% deposit if you’re self-employed.

But most are going back to the norm now.

Lenders vary in terms of how much they will lend self-employed people and the type of self-employed clients they will accept. That just means you need to do a bit more research before you apply to a lender.

What if I only have one year’s accounts?

You should still be able to get a mortgage with just one year’s accounts. The majority of lenders usually want two years’ history as self-employed, but some will accept a year’s self-employed income.

There are even lenders who in some scenarios would accept the self-employed from day one. For example if someone who had one year’s accounts as an accountant decided to be a self-employed builder, they might struggle because there’s no work experience history. But an employed accountant moving to become a self-employed accountant is more likely to be accepted with a year’s accounts.

Imagine a doctor that has worked for the NHS for five years is buying into a local, established practice. Many lenders would consider that from day one because the practice already has history. So it is definitely possible to get a mortgage with one year’s accounts, and sometimes less.

As brokers we’re here to help. We’ve got a really good understanding of which lenders are most suitable for every type of client.

Are self-cert mortgages still available?

Thankfully not, but we have seen some companies try to set up self-certs abroad. I would avoid those companies like the plague.

Self-cert mortgages are not a good idea – back in 2008 a major factor in the credit crunch for the mortgage world was self-cert, and so they’re not available anymore.

Can you get a joint mortgage if one person is self-employed?

It does help to have someone else on the mortgage who’s employed, particularly when it comes to credit scoring. It will also increase the amount you can borrow, because the lender will base the loan on your combined incomes.

One thing to do before you apply for a mortgage if you’re self-employed is to have a look at your credit score and register on the electoral roll. Some lenders might score you more harshly when you’re self-employed as the risk to them is higher.

With mortgages for the self-employed a broker really comes into their own – we can look at all the different options.

What’s the difference in mortgages for a sole trader and a limited company director?

A lot of this is to do with how the lenders treat you – firstly in terms of how they calculate your income. If you’re a sole trader or running a partnership, the lender will usually take two years worth of your tax returns. They’ve got various names: tax calculations or SA302s. The lender will usually work off your net profit, which is your income after your expenses. They will usually take either an average of your last two years’ net profits or use your latest year if there’s a steady increase.

The main difference for a limited company is that even though you’re self-employed, you’re actually employed by your limited company and receive your income via salary and dividends. The majority of lenders will use your two years’ salary and dividend figures from your tax calculations.

But there are also lenders that will disregard your salary and dividends and go for your net profits instead – that will often allow you to borrow a lot more. So, as a limited company the way lenders can view you will vary considerably.

How much can a self-employed person borrow on a mortgage?

Where affordability can vary is whether the lender uses the average of your last two years or your latest year. The average income might work out at, say, £25,000 but if your latest year is £40,000 that could be quite a big difference.

But it’s with limited companies that we see the biggest difference in affordability. A limited company director may have taken a salary and dividend of say £40,000 – some lenders will take that as the income. But perhaps their net profit is £100,000 a year. Other lenders will take that as your income – which means a massive difference in how much you can borrow. NatWest or Halifax will use salary and dividends while Coventry and HSBC, for example, will use the £100,000.

If you want a rough idea of how much you could borrow, the very general rule is about 4.5 times your income, up to a maximum of about 4.75 and, in some very rare instances, up to 5 times.

What documents do you need when applying for a self-employed mortgage?

There are the usual documents which are the same for an employed person – your ID, proof of address and bank statements. The additional documents you need as a self-employed person will potentially be your company accounts if you’re limited, usually for the last two years. I usually suggest having business bank statements ready too.

In the majority of cases the lender will ask for your tax calculations or SA302 forms which essentially confirm the net profit stated on your last tax return if you’re self-employed or salary and dividends if you’re a limited company.

Generally, banks are looking for companies that have constant income, rather than businesses with big gaps between business turnover.

If you’ve got an accountant, your mortgage broker can liaise with them directly. The accountant will be able to download the documentation we need and send it over. You pay them a fee every year, so use them to provide the information we need.

Is Buy to Let available for the self-employed?

There’s no real difference at all whether you’re employed or self-employed for a Buy to Let mortgage. Again, lenders need to confirm your income, but your personal income is not too important in the majority of cases. You’ll probably find that you’ll be in a very similar position as if you were employed.

How does remortgaging work for the self-employed?

If you were going to another lender, it is largely the same as if you’re employed. Again, it’s just remembering you’re going to have to provide more documentation to prove your income.

Because of that additional paperwork, you might decide to go for a more simple rate switch or product switch where there’s no underwriting. Essentially, you stay with your existing lender and just select a new product. It’s faster and simpler – you’re not changing anything about your mortgage. You’re just avoiding being put on a higher interest rate.

But if you did want to borrow more or change something significant, a remortgage is the same process as for the employed. It’s just about that extra documentation.

Is there any other advice on self-employed mortgages?

The only one other thing to add is that self-employed people often try to keep things simple by choosing a five year fixed rate deal, so it’s a long time before they need to go through proving their income again.

But it’s important to match your mortgage to your future needs. If you decided to move in two years or three years’ time, you might find yourself tied into a lender who now doesn’t like your self-employed income because they’ve changed their criteria. So if you think you might move in the next few years, choose a shorter deal. Then you can go out to other lenders. That’s usually the trick for a self-employed mortgage – being able to access as many lenders as possible to explore all the options.

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