Self-Employed Mortgage

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

No. There are many facets to being self-employed and forms of self-employment, but in terms of getting a mortgage, it’s on a level playing field with being employed.

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

You can still get a 95% mortgage – there are certainly lenders that will do that. It can be a common misconception, but actually there’s no difference in the types of mortgage you can get if you’re self-employed.

It’s more about whether the lender caters for self-employed people – and some very specifically build their criteria to suit those that are self-employed. They might take a bit more income or look at certain other aspects, which we’ll cover later.

But ultimately, the mortgages are all the same. It’s just whether or not that lender is happy to look at certain aspects of that self-employed person’s income.

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?

You certainly can get a mortgage with just one year behind you. As I touched on, there are some lenders that are more than happy with just one year’s self-employment, or one set of accounts.

In terms of how many years you need, it feels like a trick question because you could be self-employed for one, two or 10 or 20 years. Lenders typically just look at the last two, though.

So once you’ve filed two sets of accounts or been self-employed for two full years, that’s all the information most lenders would look at.

In an ideal world you would have two years, but there are definitely options if you’ve just done one.

My most recent year’s earnings were less than my average. Will this affect my mortgage application?
Yes, it probably will. Lenders generally take an average of the last two years to work out what your ‘salary’ is.

But if the latest year is lower, a lot of lenders will use that lower figure as your income. It can have quite an impact, actually, on what you could borrow.

How much can you borrow as a self-employed person?

You can be self-employed in a multitude of different ways. You could be a sole trader who just works for themselves – we see lots of people in construction who work as sole traders. You generally file your net profit at the end of the year, which is effectively your income.

You could form a limited company whereby you take a salary and get paid dividends.

You also have a net profit figure, which is how much money your company made at the end of the year.

To assess how much you can borrow, each lender asks different questions. For a sole trader, they might take just your net profit. But for a limited company director, they might look at your salary and net profit.

Those two figures can be vastly different. So how your income is assessed makes a real difference to what you can actually borrow.

That’s why it’s really key to plan as early as possible with a broker, so we can look at the different lenders and how they would treat your income.

How many times my salary can I borrow for a mortgage if I’m self-employed?

It depends on a number of factors, such as whether you’re taking a salary, dividends or net profit, but also how much deposit you have. People often don’t realise that.

Let’s give you an example. If somebody earns £50,000 a year and they put down a 5% deposit, they might be able to borrow a certain figure. If they earn £50,000 a year but they put down a bigger deposit, the same lender would lend them more money.

So sometimes it doesn’t just boil down to how much you earn.

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

Just referring back to the previous question, the deposit can impact how much you can borrow. So generally, a slightly smaller deposit would mean you can borrow a little bit less.

But you can start with as little as 5%. Then, with every 5% increment, so up to 10%, 15%, 20% etc, it will improve the rate that you’re offered.

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

No, they don’t exist as they did previously, quite some time ago. When I first started doing mortgages, self-certification mortgages were around – and effectively you weren’t asked to prove your income.

Long before the Financial Conduct Authority came along, you could self-certify your own income and explain what you earned, but you weren’t required to provide any proof.

Then came 2008 – and we all know what happened then. 2012 saw the Mortgage Market Review, which changed how mortgages were regulated. Since that point, self-certification mortgages have not been available, and 99% of the time, you now have to prove your income to lenders.

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

A key thing to think about is the journey. Lots of people start as a sole trader, become a limited company, and then they might employ people and have salary bills etc., which can change the way your company is structured.

It really boils down to how you’re set up. If you are a limited company, many lenders will look at the net profits that the company generates, rather than what you actually draw as an income from it.

That can be really beneficial – because lots of companies don’t take all of the money out. Ultimately, that’s a conversation that’s a really good one to have up front.

We can talk about net profits and what you’ve been drawing. If you’re a sole trader, it will always be your net profit. Your income minus your costs will give you that figure. That’s your ‘salary’ for borrowing purposes.

Will IR35 affect my mortgage application?

IR35 was brought in a few years ago under a previous government as a test to see if somebody classed themselves as self-employed, would we consider them employed?

That really depends on the applicant and where they make their income from.

From a mortgage perspective, often a self-employed applicant will know because of how they file their accounts. IR35 will only impact your mortgage application if you are potentially being considered as employed.

If you’re a contractor or a sole trader and you work for a company, the onus is on that company to tell you if there is an IR35 issue and whether or not you might be deemed as employed.

Most people who are self-employed or have been for some time will have had some kind of dealing with that. Generally speaking, by the time we’re looking for a mortgage application, we’ll have ascertained how you’re being paid. Often that means we’ll be calling you self-employed.

How will a lender calculate self-employed mortgage earnings?

I’ve covered it off for a sole trader. Where people run a business as a director of a limited company, you don’t necessarily have to pay yourself all the money.

One of the things we get asked a lot is whether you should pay yourself some more, so you can borrow some more money.

Generally, though, you could be paying yourself a salary and some dividends. The lender is going to look at the past history of those dividends and your company’s net profit. So actually, it’s all about past performance rather than what you change now.

What’s really key is that a limited company director could have lots of profit. You could have a profit of £200,000 in the business and only be paying yourself £50,000 a year.

Some lenders would actually look at that £200,000 and use that for affordability. It really does depend on a number of factors, not just including what you pay yourself, but also how well the company’s performing.

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

Almost all lenders, regardless of whether it’s a mortgage for yourself or a Buy to Let mortgage, will ask you for your personal tax computations. A lender wants to see your personal return, to understand how much money you’ve personally taken from your company or been paid in that year.

Those documents are called a tax calculation and used to be called an SA302. It’s something that accountants can supply. Lenders also need something called a tax year overview, which just shows how you paid in tax. Those are the two main things that almost every lender will always ask for.

If you’re a director of a limited company, they’ll still ask for that return to see your personal income. They may also ask you for a set of company accounts. Even though they can see you’ve personally taken some money, they want to understand whether the company is making or losing money – are the profits going up or down?

Some lenders ask for additional or slightly different documents. Some big high street lenders ask for an accountant’s certificate – often in place of those first two documents. Essentially, they give us a form and ask for your accountant to fill it in.

It encompasses all the information across those first three documents – your personal drawings, your net profits and how the company’s doing.

Sometimes, post-underwriting, we need a full tax return. When you get your tax calculation, which says you earned £30,000 last year, there is a document your accountant has filled in. It’s about 50 pages long and 30 of them are empty – it just covers all sorts of different types of income.

That lets lenders see the full income and expenditure for a sole trading applicant. But normally it’s two personal returns and potentially some company accounts – those are the most common things lenders want to see.

What else do we need to know about self-employed mortgages?

If we look at how many mortgages we do, more than half of them are for self-employed people. That’s because it can be very complicated for the self-employed, in that lenders do different things. And our job as a broker is to make that simple.

We know the lenders that prefer a limited company applicant or a sole trader as an applicant. So talk to a broker as soon as you can on your self-employed journey, so we can plan and really future-proof things, and confirm when the best possible time is to make that mortgage application.

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