The Essential Guide To Self-Employed Mortgages

All you need to know about self-employed mortgages for directors, sole traders, partners and contractors.  Learn about eligibility criteria, maximum borrowing amounts and much more.

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Graham Cox - Founder & Cemap Mortgage Advisor | SelfEmployedMortgageHub.com
Graham Cox
Director & CeMAP Mortgage Advisor

Whilst being your own boss has its upsides, one of the drawbacks is that it can be trickier to get a mortgage.

Right or wrong, mortgage providers prefer the predictable, consistent income enjoyed by people in full-time jobs. And despite the often precarious nature of employment, an employee represents a lower risk for the lender's security.

Nonetheless, getting a mortgage if you're self-employed doesn't have to be complicated. Before buying a property, seek specialist advice from an experienced self-employed mortgage broker. Their understanding of lenders' income requirements and eligibility criteria are key to getting a great deal.

Can I get a self employed mortgage with 1 year's accounts?

Absolutely. Whilst it's fair to say getting a mortgage with just a single year's books is trickier than if you have two, there are still a few lenders happy to consider it.

Your year one accounts and self-assessment tax return must have been submitted to HMRC and lenders will want to view your business bank statements for the last 3-6 months of trading.

Some lenders additionally ask for a signed letter or form from your accountant outlining your financial projections for the current year.

Is it possible to get a mortgage without any accounts?

No. There are currently no providers willing to lend if you're newly self-employed, and yet to complete your first year's company accounts.

However, if you're coming up to your year end, get in touch. We can source you a competitive mortgage deal as soon as your accounts are submitted to HMRC.

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How much can I borrow?

The maximum amount you can borrow to buy a property varies between lenders, and depends on your circumstances. Many are happy to lend at a multiple of 4.5 x single or joint earnings.

A few lenders will only go up to 4 x income, whilst others will work to a multiple of 5 or even 6 for high earners and/or those working in professional roles, such as doctors, actuaries, architects and solicitors.

It's important to remember the income multiple is a maximum borrowing amount. Before applying for a mortgage, consider whether you actually need or want to borrow the maximum amount a lender will permit.

Stricter mortgage lending criteria

The way lenders assess mortgage loan applications has changed.

Reckless mortgage lending in the run-up to the 2008 financial crisis, including self-certified mortgages (a.ka. 'liar loans'), led the government to launch the Mortgage Market Review (MMR), an industry-wide examination of UK mortgage regulation. As a result, tougher rules and regulations came into effect in 2014.

Stress-testing mortgage affordability

The new regulations' purpose was to avoid mortgage borrowers getting into financial difficulty by taking out potentially unaffordable loans.

One of the biggest changes was the mandatory requirement for lenders to 'stress-test' an applicant's ability to afford the mortgage payments on a property purchase.

The stress test is designed to assess whether the mortgage is affordable, even if the interest rate were to rise to 3% above the lender's standard variable rate (SVR), although this will fall to 1% above SVR from August 1st 2022. As part of the affordability assessment, lenders check:

  1. your credit score and history
  2. the number of financial dependents you have, if any
  3. your monthly expenditure

Financial dependents can be your children or elderly relatives. As you'd expect, younger children are considered a greater financial commitment than teenagers. On the plus side, they tend to be slightly lower maintenance...so every cloud!

The importance of reducing credit commitments

Mortgage companies will investigate your spending habits thoroughly, by checking bank statements and running credit checks.

An area of spending they particularly focus on, is what's known as 'committed expenditure'. In other words, any payment you are locked into, for a period of time.

Credit commitments are a good example, and any unsecured loans, car finance or credit card debts could affect how much you can borrow, or even whether you can borrow at all. So if you can reduce or clear them before applying for a mortgage, it's a good idea to do so.

There are many other types of committed expenditure, including spousal support, child maintenance, and school fees.

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What mortgage deals are available to the self-employed?

The same deals as those for employed applicants. One or two loan providers have dedicated self-employed mortgage ranges. But generally, the same products are available, regardless of employment status.

What's different is the way a self-employed person's income is assessed for a mortgage, and the length of time they need to be trading for is longer than someone needs to be in an employed position.

How is my income assessed for a mortgage?

How your income is assessed will depend on the lender's criteria, and the structure of your business. But these treatments are very common:

  • Sole Traders: net profit
  • Directors: salary and dividends
  • LLP equity partner: share of LLP net profit
  • Contractors: Day rate x number of days worked a week x 46 weeks

Not all lenders use the same methodologies. For example, some banks and building societies will consider a director's salary and net profit (after corporation tax) rather than salary and dividends. Which could allow you to borrow more. One or two providers are even happy to use pre-tax net profit, or salary, dividends, and retained profit.

Some mortgage providers use 48 weeks of work for contractors, though either 46 or 48 weeks is conditional on the contract actually specifying that many weeks work. Lenders will use the actual number of contracted days, where it's fewer.

Visit our documentation checklist guide to learn what paperwork you'll need before applying for a self-employed mortgage.

I have bad credit. Can I still get a mortgage?

Getting a self-employed mortgage with bad credit is entirely possible. Ultimately, banks, building societies and non-mainstream lenders are all concerned with:

  • the nature and severity of the adverse credit
  • how long ago it occurred
  • the value of the adverse credit event
  • whether the debt was satisfied or agreement was reached to settle the debt

What forms of poor credit will lenders work with?

Each mortgage provider has it's own tolerance for risk, and will set criteria accordingly. Many  lenders will consider milder forms of bad credit such as a single, low-value, satisfied default, a late payment on a mobile phone bill, or even a satisfied CCJ.

Where it becomes more difficult is with the following types of adverse credit:

  • recent, multiple missed or late payments or arrears
  • unsatisfied defaults or CCJs in the last year or two
  • high value, defaults or CCJs in the past year or two, even if satisfied.
  • more severe bad credit like ex-bankruptcy, IVA or a Debt Management Plan (DMP).
  • a previous repossession
  • missed mortgage payments

Even then, we have access to specialist, adverse-friendly mortgage providers willing to consider each case on its merits. And lenders as a whole have become slightly more flexible over the years with people who have a low credit score.

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Is Help to Buy available to me if I'm self-employed?

Yes, if you're a first-time buyer.  The Help To Buy: Equity Loan Scheme does not discriminate between employed or self-employed applicants. We have more information about Help To Buy in our self-employed guide to 5% deposit mortgages.

Getting a self-employed mortgage quote

If you're ready for a mortgage or remortgage quote, or simply need advice, please call us on 0117 205 1695 during our office hours of 9 am-5 pm Monday - Friday.

We scour thousands of mortgage deals to find the most appropriate product for your circumstances, eliminating the risk of ending up with an inferior deal. We can also save you wasting precious time, attempting to find a suitable deal by yourself.

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Faqs

Get answers to your most common questions below...
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Can I get a self-employed mortgage if I've been declined elsewhere?

Yes, absolutely. There are any number of reasons why a lender might decline your mortgage application.

The important thing to remember is each provider has its own lending criteria, and just because you've been declined by one institution, it doesn't automatically follow you'll be declined for your mortgage elsewhere.

This is where a specialist broker like SEMH can help. Not only do we have an in-depth understanding of lender requirements, the niche providers we have access to, are often more flexible in their lending approach.

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How quickly can I get a self-employed mortgage?
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Unlike traditional brokers, our digital application process makes it quick and simple to get a self employed mortgage.

We can usually provide a Decision in Principle (DIP) within 24, once we have the relevant info and documentation to hand.

Each lender will have different volumes of applications, and therefore timeframes to process cases. But 4-6 weeks is common.

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Does a self-employed mortgage cost more?
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No, not usually. Some lenders do have dedicated self-employed mortgage products which tend to be more expensive. However, the majority don't, and you'll have access to exactly the same mortgage deals and rates as employed applicants.

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Will the lender carry out a credit search?
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Yes, all lenders carry out a credit search with one or more Credit Reference Agencies (CRAs).

A majority carry out a soft footprint search at the Agreement (aka Decision) in Principle stage, and then a hard footprint search at the formal application stage (FMA). Some mortgage providers do a hard search at the AIP stage.

It is only the hard footprint that other lenders can see when they do a search.

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Graham Cox

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited. Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK find great mortgage deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, Financial Times, and BBC Bristol.