Self Employed Mortgage Guide

What are the challenges?

Applying for a mortgage when you’re self-employed can be far more challenging in comparison to being a permanent member of staff. The main reason being, it’s more difficult to prove to a lender the income is sustainable. Due to the nature of being self-employed and having no set income/work, lenders will often ask for a number of documents to help them assess these types of applications.

As a lender they will be looking at the risk they’re taking, this may result in them not lending as much to self-employed applicants or could mean a larger deposit is required (depending on lender). This isn’t the case with every lender, which is something we’ll explain along the way.

Another common challenge we find with self-employed applicants is that their income can sometimes, on paper, be fairly modest to reduce the tax liability at advice from their accountant. This can then lead to not being able to borrow enough as it’s not necessarily a fair reflection of their income.

Why most lenders average income

As it’s likely for income to fluctuate month on month or year on year for a self employed worker, lenders will often average the income to ensure they’re taking a sustainable figure as income rather than it being inflated for just one year to drop in the following year. If the income in the most recent year has fallen compared to the previous year, the lender is likely to use the lower figure and will want an explanation as to why the income has fallen and must be satisfied that this won’t be an ongoing trend.

What income is used on my application?

Depending on how you operate would determine what income is used on the application and also the lender the application has been made too.

For sole traders and partners in LLP’s, it’s more straight forward as the lenders will use the Profit from Self-Employment figure or Partnership Income showing on the tax calculation / SA302. Depending on the lender, they may need a 2-3 years worth of the documents and take an average of the income shown on the tax calculations.

When operating via a Limited Company, there may be a number of ways to prove income. Most lenders will rely on the Directors Salary and Dividend drawings, again this could be over a 2-3 year period and an average taken. However, there are some lenders that will rely on the Directors Salary and the Profit figures for the business (this may be operating profit or net profit depending on the lender).

Although the majority of lenders will rely on an average over 2-3 years for any of the income mentioned above, there are options where we may be able to use the most recent years figures for affordability, or just one years worth of income proof.

Do I pay a higher interest rate on my mortgage?

There are a handful of lenders where there might be different products offered to self-employed applicants, however with most lenders this is not the case. Sometimes it may be the case that not every lender would be willing to offer a mortgage due to a number of variables, therefore this could lead to a smaller amount of options meaning a higher interest rate. But the bottom line is, most lenders will not penalise self-employed applicants with a higher interest rate.

What are my options if I’ve got less than 2-3 years worth of income proof?

If you have less than 2 years accounts / tax calculations, there may be options to still obtain a mortgage. There are lenders who can accept just one years income proof, however these tend to be with more specialist/niche lenders, which usually results in a higher interest rate being charged (due to taking more risk).

Depending on the industry you’re working in, it may be possible to get a mortgage using a combination of the first years income proof along with previous employed income proof such as P60’s and payslips to evidence the income is sustainable.

Some lenders may rely on a projection for the future years income which would need to be confirmed by the accountant acting on behalf of the business or person.

Why use Connely Roberts?

We almost a decade of experience working with self-employed applicants getting them the mortgage they deserve. We are specialists in working with complex incomes and have deep knowledge into our lenders criteria to ensure you’re income is considered in the right way.

If you’re currently self-employed and need further information, visit our self employed page or contact us to find out more.

Your property may be repossessed if you do not keep up repayments on your mortgage.

We typically charge a broker fee of £495, however the amount we charge can depend on your individual circumstances.

*Source: https://www.statista.com