Self-Employed Mortgages

“We tailor our advice to you and manage everything with the lender from that initial application all the way through to your mortgage offer. Then we work with your solicitors right through to completion.”

Mike Haupt – Mortgage Adviser

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Self-Employed Mortgages (Part 1)

Mike talks us through the self-employed mortgage process.

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

I wouldn’t say it’s hard, but I admit it’s more complex. Being self-employed definitely has its pros and cons. I love being self-employed – the freedom is great. But when it comes to borrowing money on mortgages, it does make things a little bit more complicated.

There can be a lack of understanding from lenders – we saw this especially through Covid. You need to have a certain history, even though that may not necessarily affect your income.

You often need extra paperwork to answer all the questions from lenders – and it can feel a bit like an interrogation. It’s more complicated than for someone who’s employed and just turns up with three pay slips.

So for someone who is self-employed, preparation is absolutely key. Starting those conversations early is really important. You might be in a position where you’re ready to go. You can borrow the money you want and move straight away. But I’ve also had cases where we start planning two years ahead to get somebody into that position.

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

There’s no difference at all for an employed person or a self-employed person. There shouldn’t be any restrictions on the deposit amount – that’s a different criteria to how you’re employed and where your income is from. So yes, you can get a 5% deposit mortgage.

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?

In the vast majority of cases, a lender is going to want to see a two-year history of your business and two years’ accounts. That’s how they work out what your income is.

A few lenders will potentially look at one year’s worth of accounts, depending upon your business type and what you were doing beforehand.

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

I’ll be really blunt – yes, it will. Lenders usually take an average of the two years, but if your latest year is lower, the likelihood is that the lender will just use that lower figure.

But it will depend upon how big the gap is. For example, if it’s £41,000 in year one and £38,000 the year after, that won’t be so impactful. But if it was £40,000 and dropped to £20,000, it’s going to have a much bigger impact.

It’s definitely something that we need to have a look into and plan for.

How much can I borrow as a self-employed person – how many times my salary?

It will vary, depending on many different things. Whether you’re self-employed or employed, the answer is the same. There’s no negative impact of being self-employed here.

Each lender has its own approach to the affordability assessment, and it’s influenced by how much deposit you’re putting down and your credit scoring. It’s very much about your own individual circumstances.

What mortgage deposit do I need if I’m self-employed? Can I use my self employment grant as a deposit?

There’s no difference between self-employed or employed. It can be as little as a 5% deposit, depending on credit scoring and your overall affordability.

Lenders have a list of acceptable and unacceptable deposits. Acceptable sources are personal savings or gifts, while loans are unacceptable – so it would depend upon the individual circumstances and also the lender.

Lenders’ rules are changing all the time around these things. So let’s just chat it through early on in the process and we can work it out for definite.

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

With self-certification, you basically signed to say that you earn a certain amount of money, and based upon that a lender would give you a mortgage. The problem was that it relied on honesty, and unfortunately the scheme was open to abuse.

It was therefore stopped, so self-certification doesn’t exist any more. Through FCA rules and lenders’ own affordability requirements, it’s important to have certainty around what your income is to make sure your mortgage is affordable.

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

In terms of the actual assessment, there’s no difference for the employed and self-employed. They will look at you as an individual. They look at your age, credit history and your commitments outside of your income.

For the self-employed they look at your business in detail – what type of business it is, how long you’ve been running, what the income is and if it’s sustainable moving forwards.

There can be differences for a sole trader versus a limited company. But generally lenders look at a two year history of your net profits based on the paperwork they get from you.

Will IR35 affect my mortgage application?

Yes, is the short answer. IR35 mainly affects three groups of people: contractors working via limited companies, umbrella company contractors and then fixed term contractors on the client’s payroll.

The legislation around IR35 changed, and while previously we could just use your day rate and base your borrowing on that, in some cases lenders now treat you as an employee. There are different affordability calculations within that.

So it can affect your overall affordability – which can be either good or bad. It’s definitely one to chat through relatively early on in the process.

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

For the average self-employed customer, it will typically be an average of the last two years’ finalised accounts. If you do self-assessment, we will need your tax calculations. If you use an accountant, we’ll be looking at your accounts as well.

It might be slightly more complex than an average of the two, but generally speaking that’s what most lenders look at.

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

Be prepared to provide a lot of paperwork. It can seem quite a daunting prospect, with all the questions and requests for documents, and that’s why it’s really important to get prepared early on.

As a minimum, a lender’s going to ask for your last two years’ tax calculations and tax year overviews, plus three months’ business bank statements.

On top of that, they may ask for accounts or an accountant’s reference. They could ask for six or even 12 months’ business bank statements – and there’ll probably be some questions off the back of that, as well.

With every self-employed client I work with, we spend time getting a really good understanding of how the income is generated and what your accounts look like. We also go through the bank statements to really understand them. Then, when we position an application to a lender, we can preempt their questions and answer them straight away.

If something in your accounts looks a bit unusual or is a regular payment that doesn’t need to be factored in, we explain that. It means they are looking at it in the right way – and ultimately will come to the right decision.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Does It Cost For An Initial Chat?

Please don’t be afraid to pick up the telephone. Contact us with any questions or any conversations you want to have. There’s no commitment, there’s no silly questions. I’m here to try and help put your mind at ease, so let’s have a conversation and answer your questions.

Self-Employed Mortgages (Part 2)

Mike is back to continue the conversation about mortgages for the self-employed. Episode two of two, recorded in May 2024.

Do self-employed people have to pay higher mortgage rates?

No. There’s no reason why somebody who’s self-employed should have to pay a higher mortgage rate than somebody who is employed. There should be no real difference, and if you’re told there is, I would challenge that.

Come and talk to us and we’ll chat it through properly to understand what’s going on and show you that you shouldn’t pay a higher rate.

Can I get a joint mortgage with a self-employed worker?

Absolutely. Whether that joint mortgage is with two employed people, two self-employed people or a mix of employed and self-employed, the process is exactly the same.

It would just be about understanding the self-employed income early on in the process, so we can give the right advice on a suitable mortgage for you.

I’ve recently gone from being employed to self-employed – how soon until I can get a mortgage?

Typically most lenders will ask for two years’ accounts, and some will ask for one year’s. But there can be a few exceptions to that depending on what you do for a living.

As an example, I’ve had a locum GP who’s gone from being employed to being self-employed. Because they’re in a similar job and it’s a professional occupation, some lenders will use predicted income from their accountant. Not every lender is going to do that, however, and it’s not going to be the case for every circumstance.

It’s worth a conversation, though, because you never know what might be possible. Even if you only have just gone self-employed and you just want to chat it through, pick up the phone.

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

Guarantor mortgages don’t really exist any more. They’ve been replaced by something called Joint Borrower Sole Proprietor. These are very similar in terms of what they do, with some slight differences.

You absolutely can still get a mortgage as a self-employed person on the Joint Borrower Sole Proprietor scheme if it’s the right thing for you, where you meet all the criteria of the product and the lender’s policy.

Can I use shared ownership if I’m self-employed?

Absolutely – there’s no difference on that scheme at all. It’s open to everybody. The most important thing is that we work out the income early on to make sure it’s possible.

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

Yes, as long as you meet the normal Buy to Let criteria, there’s nothing preventing you from getting a Buy to Let as a self-employed applicant.

How does remortgaging work if I’m self-employed?

The process is identical for the employed and self-employed. The bit where the difference comes in is probably just making sure we understand that income very early on in the process.

Once you’re six months out from your current mortgage deal coming to an end and you’re looking to remortgage, have a conversation with us. We will make sure we really understand the options available to you, including switching lenders or staying with your existing lender. The overall process is identical.

Will being self-employed with bad credit affect my mortgage deposit?

It depends on what that bad credit is. If we’re talking about a late payment or CCJs, IVAs, defaults and bankruptcies there can be different rules and options around those.

Being self-employed shouldn’t prevent you from being able to get a mortgage. You just need to meet the criteria for a lender that works with those with some form of adverse credit.

How can I get a mortgage as the director of a limited company?

Self-employed people tend to be set up in three different ways – sole traders, limited companies and limited liability partnerships. For a sole trader we’re looking at your net profit – the declared income for the year.

As a director of a company you might be taking a small salary and having dividends on top of that. You might also just be taking the net profit from the company. Lenders will look at both options to decide the best way to lend to you.

It might be the case that based on net profits of the company you can borrow more, or it might be better via salary and dividends. Our initial conversations will be very much around how your business is set up, how you get paid and your accounts. Then we can work out the best way to set up your mortgage to borrow the amount of money you need to buy or remortgage a house.

Is there anything else I can do to help my chances of getting a mortgage as someone who is self-employed?

Make sure your credit score is as good as possible, and check you’re on the electoral roll. That will help with your overall credit file.

Another tip is to start the process off as early as possible. Even if you don’t think you’re going to buy for another year or two, let’s start having the conversation. If you’re due to remortgage in six or nine months, let’s have that initial chat.

Preparation for self-employed people is really key. By making sure we can get all the we need around your income structures, we can identify the best options from a mortgage perspective.

The other aspect is working with your accountant to make sure that your income is reflective of what you’ve actually earned. Those are the key things to have a look at.

How can a mortgage broker like Tomorrow mortgages help me with my self-employed mortgage application?

It’s all about preparation and finding the lender that’s going to work best for your circumstances.

Your broker has that knowledge and provides support and guidance through the whole mortgage process to make it as simple as possible for you. It can be a bit of a minefield for the self-employed.

Having somebody who knows the market and all the options will save you a huge amount of time, stress and energy. So come and talk to us – we can just make your life so much easier.