Self-Employed Mortgage

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

I want to say it’s not harder to get a self-employed mortgage, but it might be more confusing than if you were employed. That’s certainly the case if you’re looking to approach lenders yourself and go literally bank-to-bank – because your income can vary quite significantly across a couple of years as a sole trader, limited company, et cetera.

Plus, every lender in the market has a slightly different approach and different affordability calculators. A broker like ourselves understands that. We look at your accounts, your income and we go straight to the lender that is most suitable for you.

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

Yes. You’re not penalised if you’re self-employed. It is just the complexity of your income that we need an understanding on. But yes, you can obtain a 95% mortgage, or shared ownership property… you can do pretty much what the mainstream can do.

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 more experience you’ve got, the more options you’ll have. If you’ve got two to three years as a minimum, you’re going to have a lot more lenders available to you.

But there are lenders with criteria specifically for people that have only been self-employed for one year. They’ll typically be looking at your previous experience. Is it in the same industry or same sector? You’ve had your first year’s accounts done, but what does the following year look like?

It could be crucial to have an accountant on hand, because as a qualified individual, they can put forecasts or projections in place if a lender asks. It’s also worth knowing that you can be self-employed according to HMRC or the company you’re working for, but in certain sectors lenders will treat you as employed.

Examples include IT, medical and construction industries, where if you’re a subcontractor, you might not even need 12 months’ trading – just a contract in place and three months’ pay slips.

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

The majority of lenders will use the latest figure if it’s lower than previous years. But some will do an average – they might go back three years rather than two, as well, which can help in certain situations.

This is where it’s ideal to have your accountant on hand, to go through everything and explain why it is below average. You might have paid heavily into your pension because it was financially advisable to do so. You might have bought new machinery.

I’ve just had a recent client who bought a tractor – they’re not cheap, and it had a major impact on his income. We can get a reference from the accountant to give that reasoning, but also a projection on the future year’s profitability for the lender to take into consideration.

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?

Most lenders will do 4.5 times your income as a maximum, subject to affordability. Some lenders go over and above that – but unfortunately these are often more favourable for the employed. They might do 5.5 times income if you’re employed, but less if you work for yourself.

There are still lenders that can go to about 4.5. One lender will do at least 5.5 times your income, but of course there are specific criteria around that. Usually that’s around the level of income you earn, or a certain size deposit. Specific things can contribute to whether you can borrow more than 4.5 times.

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

The deposit is straightforward, it’s no difference from the standard – it can be as low as 5%. As regards using the grant, no. Most lenders will not allow that type of loan to form part of the deposit.

What are self-certification mortgages and do they still exist?

They certainly don’t exist any longer. More than 20 years ago, and prior to that, there were some questionable practices from certain lenders, whereby you could tell them what you earn and they might not seek any evidence.

That unfortunately had a significant impact on the housing market and contributed to the crash in 2007. You now have to prove your ability to afford a mortgage with documentation.

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

The key area is how you’re set up. If you’re a sole trader or a partnership, they will use your tax calculations and tax year overviews to assess your net profit. They’ll take an average over the two years in normal circumstances, unless it has decreased.

If you’re a shareholder with more than 25% ownership, the majority of lenders will base your income on salary and dividends, but others will take salary and net profit. We would discuss which is the better option for your specific situation.

Will IR35 affect my mortgage application?

There have been changes in the rules over the five years or so. Two or three years ago, people were being guided into being employed as an agency or subcontractor.

The key thing here is your application may be affected if you’ve only recently made changes to the structure of your employment. You might be an employed agency worker, a self-employed contractor or have a limited company. It all really depends on how recently you made these changes.

We’d just assess your individual circumstances. Timing is usually the key thing here. If you’ve gone from being a self-employed subcontractor to being an employed agency worker,

as long as you’ve got a contract and a few months’ pay slips, your application probably won’t be jeopardised. Your experience and history in that line of work will be positives in the lenders’ eyes.

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

With sole traders and partnership it’s normally the net profit, which they would take from your tax calculations and overviews. It’s normally an average of the past two years, unless the latest year is lower.

For limited company directors there are a couple of options, depending on the net profit of the business before corporation tax. Dividends can also be taken into account.

So your income could be based on salary plus dividends, or net profit and salary. There are different options available there, in terms of how the company is set up and how the income can be taken into account by different lenders.

There are quirks to it, but that’s where we come in – to see and assess the best option for you.

How do I prove my income? What documents do I need if I’m self-employed and looking for a mortgage?

Sole traders and partnerships will provide a tax computation, also known as an SA302. That proves to us the declared profit from your business within a tax year. You also provide the ‘tax year overview’ which proves you’ve paid the tax that’s due, and there are no further tax liabilities.

With a limited company we can use salary and dividends as listed on your tax computation. But because you are running a limited company as a shareholder, we will also get your financial accounts.

That’s where we can look at whether it’s best to use salary and dividends or salary and net profit from your business. We’ll determine the best option for you.

The majority of lenders will also ask for bank statements for the business, not just your personal account. The reason is that your accounts and tax documents can be up to 18 months old. Lenders like to actually see how the business is going and that it’s still earning at the levels previously declared.

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