Securing a mortgage as a self-employed individual can be a more complex process compared to salaried borrowers, but it is absolutely possible. Whether you're a freelancer, contractor, or business owner, understanding the eligibility requirements, documentation needed, and the specific challenges faced by self-employed applicants can help streamline the process.
From demonstrating stable income and providing proof of earnings, to finding the right lender and mortgage deal, there are several key factors to consider. This article will walk you through everything you need to know about securing a self-employed mortgage, including advice on affordability, credit checks, deposits, interest rates, and more. With the right preparation and a solid understanding of the process, you can improve your chances of securing the mortgage that works best for your unique situation.
Yes, self-employed individuals can absolutely get a mortgage, but the process can be more complex compared to salaried applicants. Lenders evaluate self-employed borrowers differently due to the fluctuating nature of their income. While salaried employees provide a predictable income stream, self-employed individuals must demonstrate business stability and the ability to generate consistent earnings.
To secure a mortgage, self-employed applicants need to provide substantial proof of income, business profitability, and financial stability. This might include tax returns, bank statements, and financial records that outline business performance. Some lenders may ask for additional documentation, such as contracts, invoices, or business forecasts. Lenders will also consider factors like your credit score, deposit amount, and the nature of your self-employment.
The majority of lenders prefer at least two years of self-employment history when considering an application for a mortgage. This allows the lender to evaluate whether your income is stable and sustainable. However, some lenders may consider self-employed individuals who have been in business for just one year. In such cases, lenders may impose higher interest rates, require a larger deposit, or ask for additional evidence of income stability, such as a long-term contract or a clear projection of future earnings.
Lenders generally consider a range of income types when reviewing a self-employed mortgage application. This includes your net profit as reported in tax returns and financial statements, as well as any salary or dividends you draw from the business. In some cases, lenders may also take into account additional income from other sources such as rental income, freelance work, or consulting fees.
However, it’s important to note that lenders are cautious about including irregular or non-recurring income, as it doesn’t demonstrate consistent earning capacity. For example, one-off payments or fluctuating commissions may be discounted. Lenders may also adjust your income if they believe that certain business expenses have been artificially inflated to reduce taxable profit.
When applying for a self-employed mortgage, you’ll need to provide more documentation than a standard employed applicant. The most important documents include your tax returns for the last two or three years, as well as full financial accounts prepared by an accountant.
Lenders typically request tax returns in the form of the SA302, which shows your income after expenses. You’ll also need to provide a Tax Year Overview, which details the overall earnings and tax paid. In addition to your business accounts, lenders may request personal bank statements and the business’s financial statements. If you’re a director of a limited company, lenders may ask for your company’s accounts, which may include the profit and loss statements, balance sheets, and dividend distributions.
Depending on your lender and your specific business structure, you may also need to submit additional supporting documents, such as contracts, invoices, or a statement of expected earnings.
While you don’t necessarily need an accountant to apply for a mortgage, it can be highly beneficial. An accountant can ensure that your financial records are prepared in a professional manner and comply with tax laws. This can help streamline the mortgage process, especially since some lenders prefer accounts that are prepared or certified by a qualified accountant.
Having an accountant can also help ensure that your income is accurately reflected in your financial documents, and they may help you manage your expenses and taxes to maximise your earnings. Some lenders may require accounts to be signed off by an accountant before they will accept them, so it’s a good idea to work with one if you’re self-employed, particularly if you run a limited company.
Yes, many lenders do accept retained or dividends as part of your income, but the rules around this can vary. Retained profits, which are profits kept within the business rather than paid out as salary or dividends, can be considered, especially if they demonstrate your business’s capacity for future earnings.
Similarly, dividends are considered income, but lenders may scrutinise them closely, particularly if they fluctuate significantly. Lenders are most likely to accept dividends if they have been paid regularly and form a consistent part of your income. However, lenders may discount retained profits if they aren’t being paid out regularly, or they may look at them differently depending on the type of business structure you have.
As a self-employed borrower, in certain circumstances you can need a larger deposit than a salaried borrower, often though this is not the case. Most lenders expect self-employed individuals to put down at least a 5% deposit, though this can vary. In some cases, lenders may ask for a deposit of 10% to 15%, depending on the length of time trading and credit history.
There are low-deposit mortgage options available for self-employed individuals, but they are generally more difficult to obtain. Some lenders offer low-deposit mortgages with as little as 0% or £5,000 down, but these products are often more restrictive.
To qualify for a low-deposit mortgage, self-employed applicants typically need to demonstrate stable income, a strong credit score, and a well-established business. Lenders offering low-deposit mortgages may be more willing to approve self-employed applicants if they have been in business for several years and can show a consistent history of earnings. However, you may face higher interest rates or stricter eligibility criteria, such as having a larger income or fewer financial commitments.
Lenders assess affordability for self-employed applicants by evaluating their income, monthly expenses, and overall financial health. Self-employed borrowers must provide detailed evidence of their income, including tax returns and financial accounts.
The lender will calculate your average annual income from the last two years (or one year if applicable) and adjust for any irregularities or non-recurring income. Lenders will also take into account your monthly expenses, including debts, outgoings, and commitments such as loans, childcare, or maintenance payments. Additionally, lenders use an affordability calculation to assess how much you can comfortably borrow based on your financial situation. The results of this calculation help lenders determine whether you can afford the repayments and whether they should offer you the mortgage.
Your credit score itself doesn't solely determine your chances of getting a mortgage; it's more about how you manage your credit accounts. That being said, a higher credit score suggests that you are a responsible borrower and that you are likely to repay your mortgage on time.
Self-employed individuals with strong credit histories are more likely to secure favorable mortgage terms, such as lower interest rates. However, if you have a lower credit score, securing a mortgage may be more difficult, and you may face higher interest rates or be asked to provide a larger deposit. Some lenders specialise in offering mortgages to applicants with low credit scores, but these deals often come with higher costs and stricter terms.
While it can be more challenging to secure a mortgage with inconsistent income, it is still possible. Lenders prefer applicants with stable and predictable earnings, but they may still approve a mortgage if your income fluctuates. In such cases, lenders will take a more detailed look at your financial history, including the length of time you’ve been self-employed, the nature of your business, and any evidence that your income has been trending upward or remains relatively stable.
Some lenders may consider offering a larger loan if your business shows strong potential for growth, even if there have been periods of irregular income. However, self-employed individuals with inconsistent income may face stricter terms or a larger deposit requirement.
The main difference between self-employed applicants and standard PAYE (Pay As You Earn) applicants is the way lenders assess income; oftentimes there is no actual difference in the products itself. For salaried individuals, income is stable and predictable, which makes it easier for lenders to assess affordability. In contrast, self-employed borrowers often have variable income, which requires more documentation and a more detailed examination of their finances.
It can be harder to get a mortgage as a self-employed individual compared to someone with a regular PAYE job. This is primarily because lenders view self-employed applicants as a higher risk due to the potential for fluctuating income. Self-employed borrowers often need to provide more comprehensive documentation to demonstrate their income and financial stability.However, with the right preparation and by working with the right broker, it’s entirely possible for self-employed individuals to secure a mortgage.
It’s generally more difficult to get a mortgage with only one year of self-employment, as most lenders prefer at least two years of financial history to assess income stability. However, some lenders may consider applicants with one year of self-employment. In these cases, you may face higher interest rates, stricter eligibility criteria, or be required to provide a larger deposit.
Most of the time there aren't specific mortgages for self-employed people. They typically apply for the same standard products as salaried borrowers. Higher interest rates are normally only applied in cases where the borrower has a limited trading history or a higher perceived risk.
To find the best mortgage rates as a self-employed borrower, it's crucial to shop around and compare different mortgage providers. Speaking with a mortgage broker can be particularly helpful, as they can guide you to lenders who specialise in self-employed mortgages and offer competitive terms. Your broker will compare multiple options ensuring that you get the best rate for your unique situation.
To increase your chances of mortgage approval as a self-employed individual, there are several steps you can take:
Using a mortgage broker can be beneficial for self-employed individuals. Brokers have access to a wide range of lenders, including those who specialise in self-employed mortgages. They can help guide you through the application process, ensure that your paperwork is in order, and find the best deals based on your financial situation. Mortgage brokers can also be particularly useful if you have unique circumstances or limited trading history, as they know which lenders are most likely to approve your application.
While the mortgage application process for self-employed individuals may come with additional hurdles, it is far from impossible. By focusing on the key areas - such as proving stable income, managing your credit, providing thorough documentation, and shopping around for the best deals - you can significantly improve your chances of approval.
Whether you're a first-time buyer or looking to refinance, understanding how self-employment affects your mortgage options will help you navigate the market more effectively. Working with a mortgage broker can be invaluable, as they can connect you with the right lenders who specialise in self-employed applicants. With the right approach and resources, you can secure a mortgage that meets your needs, just like any salaried borrower.