Self-Employed Mortgage

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

It shouldn’t be any harder than for someone who’s employed. We used to find that lenders could restrict self-employed borrowers, certainly from an income perspective, but that’s changed over the years.

Nowadays, most lenders accommodate self-employed earnings just the same as on an employed basis. But it’s always a good idea to use a broker like ourselves, especially if you’re not earning regular income on a PAYE basis.

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

All types of mortgages are available – from fixed rates, where you know how much you will pay each month, to tracker deals that track the Bank of England base rate and let you take advantage of any rate reductions.

You can access all the same products as employed individuals. In terms of Loan to Value, a 95% mortgage shouldn’t be an issue. The full range of Loan to Value products are available to the self-employed, just like employed individuals.

The only caveat is that at 95% Loan to Value, interest rates are slightly higher compared to a Loan to Value at 75% to 85%. That’s purely because there’s more risk to the lender if property prices suddenly drop. With a small deposit you’re more likely to fall into negative equity.

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?

With a self-employed individual submitting an application, underwriters like to see a story. They’re looking for a track record that shows you have the income to sustain those mortgage payments going forward.

The longer you can go back in evidencing income, the better. However, there are lenders that will accept just one year’s income for new startups – but not so much the mainstream lenders. The minimum length of time used to be two years, and it’s still largely the same today.

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

It can. With some lenders it will reduce the amount you can borrow, but others could take a view on the most recent year, and take any extenuating circumstances into consideration. There may be good reasons you have had a dip in earnings.

You may have had a year with some sort of capital outlay for the business – buying equipment, for example. That’s a plausible reason why your profit was lower than the year before. Every case is different, so it’s worth speaking to us and explaining what’s happened.

A lender just wants a reasonable explanation for why the income might be different. As long as that’s clearly explained, there shouldn’t be any impact on what you can borrow.

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?

Lenders change their stance on this all the time. The amount you can borrow will depend on how much income you and any other applicants bring in. You could combine your earnings with someone who’s on salaried income or self-employed income.

In most cases you can borrow between four to five times your total income. There are specific professions where lenders increase what clients can borrow. For example, in the NHS there are key worker deals for professionals earning over a certain amount. The parameters are so variable, though – we’d need another hour to go into it.

If you’ve got loans and credit cards worth a significant amount, that’s going to affect affordability. Lenders take that into consideration in how much you can borrow. If you can clear any of those down before the mortgage application, you’d be able to borrow more.

What mortgage deposit do I need if I’m self-employed?

The deposit depends on the amount you’re borrowing and the Loan to Value. It’s not really related to how you earn your income. In most cases a minimum of 5% deposit is required, so if you’re buying a home for £250,000, you would need a deposit of £12,500.

It’s always better to save as much as you can before putting in an application, but obviously, we do appreciate how difficult it is to get even a 5% deposit together.

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

Definitely not. These existed pre-2007/08 when the crash happened. It offered a way for self-employed people to self-certify their earnings to a lender, without having to produce tax returns.

It doesn’t happen now for good reason, because a lot of people were overinflating their income – they then couldn’t afford the payments and their homes were getting repossessed. So, this definitely doesn’t exist anymore.

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

All the standard checks apply as for an employed person – proof of ID, proof of address and bank statements. We also need sight of your credit history and proof of your right to work in the UK – your legal status.

For the self-employed specifically, lenders will want to check something called your SA302, otherwise known as a tax calculation. If you’re set up on the HMRC portal, you can download these, or get them from your accountant. You need at least two years’ SA302 tax calculations – and alongside that, your tax year overviews which detail the tax you owed and paid for that year.

Will IR35 affect my mortgage application?

IR35 is a way to designate whether a person is working inside or outside of a business. If you work inside a business, like an employee, you’ll be paid a salary like anyone else on PAYE. That makes affordability easy to calculate. The downside is that you might end up taking home less income after tax and National Insurance.

That could mean you can’t borrow as much as if you were classed as working outside the business. The self-employed usually take their pay in a mix of dividends and salary, so lenders assess your income slightly differently.

In all cases, your broker can talk through that impact, and we can work directly with your accountant to understand your financial situation better.

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

Lenders generally work out an average of what you’ve earned over the last two to three years. If you’ve had increasing profits, they’ll take an average of those. But if you’ve had declining profits in the latest year, the majority just take the latest year.

Some lenders will take the latest year if it’s higher – but this is quite rare. Perhaps you’ve earned £30,000 net profit in one year and the previous year was £20,000. Again, it’s all about the backstory and how that’s been achieved. Some lenders will take that into consideration and lend based on that latest year.

Speak to a broker like ourselves – we’ll review your income and give you an idea of how much you can borrow once we’ve run it past the lenders.

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

Apart from standard documents, it all comes down to those SA302s, also known as tax calculations. These detail your earnings as a self-employed person.

Whether your tax year runs from April to April or January to January, it will tell you what you’ve earned for that year. We need two to three years of those documents alongside your tax year overviews.

If we also need business accounts, we’ll ask for them. The majority of time it’s just the tax documents in PDF format.

What else do you want to highlight before we return with part two?

There’s a lot of opinion out there on how to get a mortgage application through. But it’s always best to speak to a broker, because the criteria changes all the time.

In some instances lenders relax the criteria, or they’re upping the income multiples. It changes all the time – and when you consider all the lenders in the market and the number of products, it’s a struggle to stay on top of it.

I can’t emphasise the value of a broker more. Just let us do the research for you – that’s the message I would send you away with today.

Key Takeaways:

• It shouldn’t be harder for self-employed individuals to get a mortgage than for employed individuals, as most lenders accommodate self-employed earnings similarly.
• Self-employed individuals are not limited in the types of mortgages they can get and can access the same products as employed individuals, including 95% Loan to Value mortgages.
• Lenders prefer to see a track record of income, with two years being a common minimum, though some lenders may accept one year’s income for new startups.
• The amount you can borrow as a self-employed person typically ranges from four to five times your total income, and factors like existing loans and credit cards will affect affordability.
• Self-certification mortgages, which allowed self-employed individuals to self-certify earnings without tax returns, no longer exist due to past issues with overinflated incomes and repossessions.
  
  

There may be a fee for mortgage advice. The precise amount of the fee will depend on your circumstances and will be discussed and agreed with you at the earliest opportunity. Typically, in most cases, our fee will be £495. We charge £595 for bridging and adverse credit cases, and £995 payable at the offer stage for Retirement Interest Only products.

Mortgage Style Ltd, trading as Mortgage Style, is an appointed representative of HLPartnership Limited, which is authorised and regulated by the Financial Conduct Authority.

YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP TO DATE WITH YOUR MORTGAGE REPAYMENTS.