For self-employed individuals in the UK, getting a mortgage can sometimes feel like a daunting process. Unlike salaried employees, whose income can be easily verified through payslips and employment contracts, self-employed applicants must provide detailed proof of their earnings. However, with the right preparation and understanding of the requirements, securing a mortgage as a self-employed person is entirely achievable.
This guide explains how lenders calculate a mortgage for self-employed individuals and provides tips to increase your chances of success.
What Counts as Self-Employed?
In the context of mortgages, you are considered self-employed if you own more than 20-25% of a business and your income is derived from that business. This includes:
- Sole traders
- Limited company directors
- Freelancers
- Partners in a business
If you fall into one of these categories, mortgage lenders will require a detailed overview of your income to assess affordability.
How Is Self-Employed Income Assessed?
Lenders use various methods to calculate your income and determine how much they are willing to lend.
The key factors they consider include:
Trading History
Most lenders require at least two years of trading history. They will typically ask for your:
- SA302 forms (or Tax Calculations) from HMRC
- Corresponding Tax Year Overviews
These documents show your declared income and tax paid, giving lenders confidence in your financial stability.
Net Profit (For Sole Traders and Partnerships)
If you are a sole trader or in a partnership, lenders will usually base their calculations on your net profit. This is the income remaining after your business expenses have been deducted.
For example:
If your net profit was £40,000 last year and £42,000 the year before, some lenders may take an average of the two (£41,000) as your income. Others might use the most recent year’s figure if it’s higher.
Salary and Dividends (For Limited Company Directors)
For limited company directors, lenders will look at your:
- Salary paid through PAYE
- Dividends withdrawn from the business
In some cases, lenders may also consider the company’s retained profits, especially if you keep a significant portion of your earnings in the business.
Day Rate (For Contractors)
If you work as a contractor, lenders might calculate your income based on your day rate. This is often multiplied by the number of working days in a year (usually 230-260 days, depending on the lender) to determine your annual income.
How Much Can You Borrow as a Self-Employed Applicant?
Like salaried applicants, self-employed individuals can typically borrow between 4 to 4.5 times their annual income. For instance:
- If your average income is £50,000 per year, you might be eligible for a mortgage of £200,000 to £225,000.
However, the actual amount you can borrow will depend on other factors, including your credit history, deposit size, and monthly outgoings.
Documents You Need to Provide
To support your mortgage application, you’ll need to supply the following:
- Proof of identity: Passport or driving licence
- Proof of address: Utility bills or council tax statements
- Business accounts: Prepared by a certified accountant, if available
- Tax documents: SA302 forms and Tax Year Overviews from the last two to three years
- Bank statements: Personal and business accounts, typically covering three to six months
Tips to Improve Your Chances of Approval
Keep Clear Financial Records
Ensure your business accounts are up-to-date and prepared by a qualified accountant. This adds credibility to your application.
Pay Down Debts
Lenders assess your debt-to-income ratio, so reducing any outstanding loans or credit card balances can improve your affordability.
Save a Larger Deposit
A deposit of 15-20% can make you a more attractive candidate to lenders, especially if your income fluctuates.
Work on Your Credit Score
Check your credit report regularly and address any issues. A higher credit score increases your likelihood of approval.
Use a Specialist Mortgage Broker
A broker experienced in self-employed mortgages can guide you to the most suitable lenders and streamline the application process.
Common Challenges and How to Overcome Them
Limited Trading History
If you have less than two years of accounts, some specialist lenders might still consider your application. However, you may need to provide additional evidence, such as future contracts or projections.
Fluctuating Income
If your income varies year-on-year, lenders may average your earnings over two or three years. Be prepared to explain any significant drops or increases.
Low Declared Income
If you minimise your taxable income to reduce tax liabilities, it may affect how much you can borrow. Consider striking a balance between tax efficiency and mortgage affordability.
FAQs
Can self-employed people get a mortgage?
Yes, self-employed individuals can get a mortgage. However, lenders require proof of income through documents like tax returns, business accounts, and SA302 forms, as opposed to payslips.
How many years of accounts do I need to apply for a mortgage?
Most lenders in the UK require at least two to three years of accounts. However, some lenders may accept one year’s accounts if your business is performing well and other parts of your application are strong.
What documents do I need for a self-employed mortgage?
Typically, lenders will ask for:
- Proof of identity and address.
- SA302 tax calculations and tax year overviews from HMRC.
- Two to three years of certified accounts (or fewer, depending on the lender).
- Bank statements (personal and business).
Do I need a higher deposit as a self-employed person?
Not necessarily. The deposit requirements are the same for self-employed and employed individuals. However, having a larger deposit (e.g., 10-20%) can improve your chances of approval and help you secure better mortgage rates.
How do lenders calculate income for self-employed borrowers?
Sole Traders/Partnerships: Lenders usually take an average of your net profit over the last two to three years.
Limited Company Directors: Lenders assess your salary plus dividends. Some may consider retained profits if you own a significant portion of the company.
Contractors: Lenders may calculate your income based on your day rate, annualised over 46-48 working weeks.
Can I get a mortgage with just one year of trading history?
Yes, some specialist lenders may accept one year of trading history. You’ll likely need to provide strong evidence of income, a good credit score, and a larger deposit to improve your chances.
What happens if my income fluctuates?
If your income fluctuates, lenders may average your income over two or three years to determine affordability. A strong upward trend in profits can work in your favour.
Do I need an accountant to apply for a self-employed mortgage?
While it’s not mandatory, having a qualified accountant prepare your accounts can make your application process smoother. Many lenders prefer accounts signed off by a chartered or certified accountant.
What if I have a bad credit score?
A poor credit score can make it harder to get approved for a mortgage. However, some lenders specialise in offering mortgages to people with bad credit. You may need to provide a larger deposit and accept higher interest rates.
Can retained profits in my business be considered as income?
Some lenders may consider retained profits as part of your income if you’re a limited company director, but this depends on the lender’s criteria.
How much can I borrow as a self-employed person?
Self-employed borrowers can typically borrow 4 to 5 times their annual income, depending on factors like credit score, deposit size, and existing debts. Lenders may average your income over multiple years to calculate affordability.
Do self-employed people pay higher mortgage rates?
Not necessarily. Self-employed borrowers pay the same rates as employed borrowers, provided they meet the lender’s criteria. However, if your application is considered higher risk, you may face higher rates or require a specialist lender.
Can I use a mortgage broker as a self-employed person?
Yes, using a mortgage broker is often beneficial for self-employed applicants. Brokers can help you find lenders that specialise in self-employed mortgages and understand your unique circumstances.
How can I improve my chances of getting a mortgage?
To boost your chances:
- Maintain accurate and up-to-date accounts.
- Save a larger deposit.
- Improve your credit score.
- Avoid major expenses or new debts before applying.
- Work with a mortgage broker who understands self-employed applicants.
Can I remortgage as a self-employed person?
Yes, self-employed individuals can remortgage, but you’ll need to provide updated financial records to prove your income. Working with a broker can make this process easier.
Continue Reading
Self-employed mortgages London
Switching from interest-only to a repayment mortgage
Single brick construction mortgage
How to get a mortgage with 1 years’ accounts
How much can I borrow for a mortgage?
Mortgage with a gifted deposit
Joint mortgage with bad credit