Self-Employed Mortgages With 1 Year's Accounts

How much can I borrow on a mortgage with 1 year's accounts?

For self-employed mortgages, the same income multiple usually applies regardless of how many years trading history you've got under your belt.

Loan to income multiples

Most mortgage providers will lend around 4.5 times your single or joint income.

For higher earners and/or self-employed professionals such as solicitors, doctors, accountants and architects, a few specialist lenders will allow borrowing between 5 and 6 times earnings. However, you'll probably need more than one year's accounts.

Keep in mind the numbers above are maximum borrowing multiples.

To decide how much they are prepared to lend, all mortgage companies assess self-employed applicants based on their full personal and financial circumstances including:

• credit score
• loan-to-value
• property type (ie flat or maisonette a house)
• financial dependents
• whether profits fluctuate wildly from year to year
• credit commitments
• other financial commitments like school fees, spousal support and child maintenance
• mortgage term
• number of years trading

If you'd like a quote or to find out how much you can borrow based on your first year's trading performance, book a free consultation with a mortage broker here

Credit commitments

Regardless of whether the applicant is self-employed or employed, a key factor affecting an applicant's ability to get a mortgage is the level of ongoing credit commitments they have.

High credit card, personal loan or car finance debts could result in your mortgage being declined, though sometimes mortgage providers will agree to lend a lower amount if you can increase your deposit to make up the shortfall.

The mortgage term and affordability

From an affordability perspective, the longer the term, the more affordable the monthly mortgage payment becomes. Extending the mortgage term up to age 70 or even 75, if you plan to retire then, can help enormously with affordability.

One thing to bear in mind with extending the mortgage term is you'll pay more interest overall, even though your monthly payments are lower.

The suitability of your work role for extending the term

An increasing number of lenders allow the mortgage term to run up to your 75th birthday if they assess that it would be possible for you to work in your business until that age.

For example if you own a service business and your job is deskbound rather than physical running aconstruction company.

Mortgage lending into retirement

For lending into your retirement years, up to age 80 or 85 for example, the bank or building society will usually require evidence that your pension income will be sufficient to cover the mortgage payments.

For this reason, self-employed mortgages are more difficult to secure if you extend the term into retirement, though it's absolutely possible depending on circumstances.

How do mortgage lenders assess income?

This depends on your self-employment trading style. For sole traders and LLP equity partners, lenders will generally use the net profit figure before tax, as evidence of income.

For limited company directors, lenders use either:

• Salary and dividends or...
• Salary and net profit (after corporation tax)

We recommend you let your qualified accountant know of your plans to buy a property, so they can prepare your first year's accounts in the most advantangeous way possible.

As long as gross income is over a certain threshold, usually around £75000 per annum, contractors are typically considered employed for income assessment.

That usually means the lender will work off your gross day rate, potentially allowing you to borrow more.

The usual formula to calculate income is either 46 or 48 weeks x 5 x day rate.

For example, Charlotte works 5 days a week as an IT contractor. Her day rate is £450 and the lender uses 230 days a year (46 weeks) as its default for income assessment. Charlotte's gross income will therefore be assessed as £103,500 (46 x 5 x 450).

Bear in mind, that If the contract specifies a lower number of working days, that figure will be used instead to work out gross income.

What documents do lenders require to prove my income?

Whilst each lender has it's own specific requirements to verify a self-employed borrower's income, they broadly use the same documentation.

We've summarised the business financial documents required below but please read our mortgage document guide for a comprehensive list.

Sole Traders and Limited Liability Partners

• SA302 tax calculation for the first year showing net profit
• The HMRC Tax Year Overview (TYO)
• Your first year's finalised and HMRC submitted accounts.
• The last 3-6 months business bank statements

Limited Company Directors

• Finalised and HMRC submitted company accounts
• Your SA302 tax calculation
• The accompanying Tax Year Overview
• Sometimes an accountant's certificate is required.
• The last 3-6 months business bank statements

Contractors

Where the contractor is treated as employed for income assessment purposes, lenders will require:

• a copy of the latest contract
• the latest 1-3 payslips or business bank statements

Where the contractor is treated as self-employed, lenders will ask for either your sole trader or Limited company director documentation as described above.

Do I lose my trading history if I change from sole trader to limited company?

Good question. It depends on whether you are continuing to work in the same industryor not.  

If the business itself hasn't changed, then the years spent as a sole trader won't be discounted when you change trading style to a Limited company.

So 3 years as a sole trader and one year as a limited company would count as 4 years of trading and books.

To get a self-employed mortgage, most high street lenders require the first year's limited company accounts despite the previous sole trader history. However, a small number are happy to lend before completing the first year.

Can I get a 95% LTV mortgage with just 1 year's accounts?

Currently, it's unlikely you'll be able to get a 95% loan to value self-employed mortgage with 1 year's accounts.

Lower mortgage rates are available if you have at least 10% to put down, though a 15% deposit is usually required.

Many 95% LTV deals are available with two or more year's trading history.

Can I get a mortgage with 1 year's accounts and bad credit?

Yes, it's possible to get a mortgage with 1 year's accounts and bad credit.

Your chances of getting a self-employed mortgage deal will come down to the severity of the adverse credit, and how recently it occurred.

For example, many lenders only allow one or two, low-value payment defaults or CCJs over the proceeding 2 years, but won't accept an applicant who has been made bankrupt or settled an IVA in the past 4 or even 6 years.

But we also have access to specialist lenders who will consider most self-employed mortgage scenarios on their individual merits. Just bear in mind that their interest rates tend to be higher than those of high street lenders

Getting a mortgage with 1 year's books

As a specialist mortgage broker for small business owners, we know which lenders are most likely to fit your circumstances, and can present your application in the best way to improve your chances of being accepted.

If you're ready to apply, speak to an advisor today on 0117 205 0655 or click here to get started.