Self-Employed Mortgages With 1 Year's Accounts

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

In most cases, the same income multiple applies regardless of how many years of accounts 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 professionals such as solicitors, doctors, accountants and architects, between 5 and 6 times earnings is possible with some lenders.

Keep in mind the numbers above are maximum borrowing multiples. All lenders assess your full personal and financial circumstances for affordability when deciding how much they are prepared to lend.

Factors affecting mortgage affordability

One of the biggest factors affecting mortgage affordability is ongoing credit commitments.

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, 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.

One or two 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, you're far more likely to be accepted up to age 75 if you own a service business rather than a construction 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 want to see evidence your pension income will be sufficient to cover the mortgage payments.

For this reason, extending the term beyond your working years can be tricky, though obviously, it depends on individual 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 your 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 accountant know of your plans to buy a property, so they can maximise your dividends or profits from your first year.

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

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).

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 borrower's income, they broadly use the same documentation.

We've summarised the business financial documents required below but for a comprehensive list of documents required for the mortgage application, please visit our mortgage document guide here.

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 verification 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 for income verification purposes, 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?

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Good question. It depends on whether you are working in the same industry or 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.

We've summarised the business financial documents required below but for a comprehensive list of documents required for the mortgage application, please visit our mortgage document guide here.

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

Yes, it's possible to get a 95% loan to value mortgage with just one year's accounts. But very few lenders will consider it and it's very much dependent on your personal circumstances.

Far more deals, and lower mortgage rates, are available if you have at least 10% to put down. Some lenders require a 15-20% deposit with just one year's books.

I've got bad credit on my credit file. Can I still get a mortgage?

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

Your chances of getting a 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 flexible adverse-friendly lenders who will consider most scenarios on their individual merits. However, their interest rates tend to be higher than you'll find with mainstream lenders.

Getting a mortgage with 1 year's books

Without a doubt, being accepted for a mortgage when you only have one year's accounts is more difficult than for someone with a longer trading history.  

Nonetheless, with specialist advice, and access to the right lenders, a deal is possible.

As a specialist self employed mortgage broker, we know which lenders are most likely to fit your circumstances, and can present your application in the best way to increase 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.