Self-employed mortgages

There’s no such thing as a self-employed mortgage. Sole traders, contractors and company directors have access to the same mortgages as normal employees. But lenders will look at your finances more closely.

According to the Office for National Statistics (ONS), there are around 4.8 million self-employed workers in the UK. Since the regulator banned self-certification mortgages in 2014, the self-employed undergo the same affordability checks as everyone else.

In fact, to minimise risk, mortgage lenders often ask for at least three years of accounts and tax returns.

Your income, outgoings and overall affordability are closely examined, which can make it tougher to get your mortgage approved. It can be even more difficult for those who have been self-employed for less than two years or have earnings that fluctuate.

Self-certification mortgages

Self-certification (self-cert) mortgages permitted borrowers to apply for a mortgage without having to prove their income. The borrower could certify what they earned themselves.

The Financial Conduct Authority (FCA) banned self-certs in 2014 deeming them too risky for borrowers. The fear was people were borrowing more than they could afford to repay, or even lying about their income.

Self-cert mortgages were popular with the newly self-employed because they allowed for minimal evidence of verified accounts.

They were also used by people with a low base salary and uncertain additional earnings, like commission or bonuses.

Although you can no longer get a self-certified mortgage from a UK-regulated lender, you could get one from a European-regulated lender. The watchdog has warned borrowers against this.

Can I get a mortgage if I’m self-employed?

Yes. The same mortgages are available to the employed and self-employed. The mortgage application process may be longer because lenders require additional proof of income.

You should not be penalised for being self-employed nor charged a higher interest rate. The interest rate is based on the size of your deposit and your affordability.

Just as for an employee, you’ll get the best rates if:

  • Your finances are in order
  • You are on the electoral roll
  • You can afford to pay back any credit cards or loans
  • You are free from bankruptcies, County Court Judgements (CCJS) and defaulted payments

But lenders will also pay close attention to your:

  • Business structure – sole trader, limited company or partnership
  • Income
  • Salary or dividends
  • Net profit

Lenders usually assess fluctuating incomes on an average of the last three financial years (6 April to 5 April). But they may base your affordability on the most recent year if your net profit is significantly lower.

Net profit is the money left over after all your expenses have been paid. It is different from revenue/turnover, which is the net sales generated by a business.

The problem with mortgages and the self-employed

Sole traders and freelancers often present their accounts in the most tax-efficient way possible. You do this by offsetting a lot of expenses against the business. So, while turnover may be reasonably high, net profit is low.

Lenders look at your net profit when deciding if or how much to loan you. The lower your net profit, the less you will be able to borrow. The reverse of this is also true: the higher your net profit, the more you can borrow…but then you will need to pay more tax.

Similarly, paying yourself minimal dividends from a new limited company will impact on your ability to get a loan.

This is why people often think you cannot get a mortgage if you are self-employed.

How lenders assess self-employed income

Lenders now have very strict criteria when they work out what you can afford. Some ask to see copies of your bank statements for the past six months to a year, whereas others require the last two or three years.

Your company or freelance accounts must be verified by an accountant. Lenders do not accept them without this.

Many base their assessments on average annual living costs and your disposable income above that figure. They may also take into account business assets, savings and investments, and ask you to put these down as part of your deposit.

Outstanding credit like personal loans, car finance agreements and credit card debt will lower the amount a lender gives you.

Senior mortgage manager at mortgage broker John Charcol, Ray Boulger says: “The difference between an employed person and a self-employed person is how you calculate income, what income you can prove and how you can prove it.”

“In general, most lenders will want two years of accounts – some may accept one year and others may require three. There will be a smaller number of lenders if you only have one year’s worth of accounts, but you will still be able to get a mortgage.”

Things get more complicated with incorporated companies. This is because some profit is retained within the company while the rest is paid as a salary and/or dividends. Some lenders take this retained profit into account, while others assess affordability on your total salary and dividends paid out.

“The better your account is in terms of expenses written off against the business, the more it reduces the amount you can borrow,” Boulger says.

You will need to decide what will cost you least overall – more tax or a higher mortgage interest rate.

Make your finances more attractive to lenders

Boulger explains that as a sole trader, some lenders will offset certain expenses against income, such as the use of a home office. Your net profit would therefore be higher overall and increase the amount you could borrow.

The longer you have been self-employed, the better your chances of getting a mortgage. That’s not to say those who are newly self-employed cannot get a mortgage though.

Precise financial records will help your case. Show you have a steady stream of income and do not live beyond your means.

You’ll need a deposit of at least 5% giving you access to 95% loan-to-value (LTV) mortgages. As with all mortgage applicants, the bigger your deposit, the lower the interest rates.

Try to keep your outgoings modest for the six months before you apply for a loan. Avoid any “big ticket” items, reduce spending on luxuries, and try to live within your means.

How to speed up the process

Thanks to the additional financial details lenders require from the self-employed, the application process can take a while.

Here’s what you can do to speed it up:

  • File your company accounts early. You need to be able to show the last two years’ worth of fully verified accounts. The more detail, the better.
  • Have your tax information to hand. You can get an overview of up to four years’ worth of self-employed earnings by asking HMRC for your SA302 evidence of earnings. Access your most recent Self Assessment details by logging into your online account.
  • Show your invoice history. If you work for an umbrella company or freelance agency you’ll need to show proper records of all past payments.
  • Get hard copies of bank statements. Your lender will want to look at your outstanding financial commitments and how you manage your money on a monthly basis.

Edited by: Sarah Guershon

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Last updated: 31 May, 2019