Self-Employed Mortgages

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In the latest Mortgage & Protection podcast, Graham Sharkey talks about Self-Employed Mortgages. 

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

It can be, but the good news is there’s plenty of choice out there. All lenders are happy to consider self-employed people, although the big focuses are how the lender views your income, whether you will meet the criteria and will it give you the level of borrowing you require. 

The answer is heavily reliant on your personal tax return and the figures showing on the tax calculation, or SA302 as it’s sometimes referred to. If you own shares in a limited company you will need to provide company account also. 

Everybody’s circumstances are different, but generally lenders will ask additional questions when you’re self-employed, and there’s a fair bit of narrative that we may need to add to your application to get an underwriter comfortable. 

What if I only have one year’s accounts, can I still get a mortgage?

You can, but we will be broking within a much smaller pool of lenders because it’s a niche area. The market terms are not as good as they would be if you had two years’ accounts, so unless timing’s an issue, I’d always advise a client to wait until they have at least two years’ accounts or tax returns. It means we can secure a much better rate. 

You’ll probably need a slightly bigger deposit than the traditional 5% – it will really help if you have 15%.

Are self-cert mortgages still available?

No, thankfully self-cert mortgages are a thing of the past. They were open to heavy abuse before the credit crunch and contributed considerably to the 2008 financial crash. They were banned in 2014. 

I can guarantee that self-cert won’t ever be returning to the mortgage industry. The only way to obtain a mortgage when self-employed is to prove your income and that is easily done via your tax returns or company accounts. There’s just no need to self-certify your income if you’re declaring it accurately to HMRC.

Can you get a joint mortgage if one person is self-employed?

Absolutely. The lender will just apply their standard criteria in assessing the self-employed applicant’s income. They will use that for affordability and then take the income of the other person as a standard, employed person. They simply add the two incomes together and it’s business as usual. There’s no issue whatsoever.

Is Buy to Let available for the self-employed?

Yes – and we’ve done another podcast on Buy to Let mortgages which is worth listening to for further information. One of the stipulations with most lenders is a minimum income, so we just need to prove you meet that. It’s generally around £25,000. 

Plenty of Buy to Let lenders will accept self-employed income to satisfy that minimum requirement. So Buy to Let mortgages are readily available subject to fulfilling the wider criteria as we describe in that podcast and on our website.

What’s the difference between a self-employed person and a limited company director?

If you’re self-employed as a sole trader, you and your business are a single entity. You submit a personal tax return to HMRC each year to disclose your income tax. Once reported, this is confirmed by HMRC and we have a tax calculation or SA302 which itemises all income in your personal name. So that’s quite straightforward. 

With a limited company director, it’s a bit more complicated. They are technically employed by the company. They are typically on a salary. The company is classed as a separate entity to the individual. Any profits generated by the company don’t technically belong to the director, they belong to the company. Typically the managing director will be a percentage shareholder or own the whole company. 

Lenders start to deem a company director as self-employed if their shareholding exceeds 20%. Traditionally a shareholder will receive a dividend in addition to their salary and a lender will combine their salary and company profits or dividends drawn (depending on the lender) to reach an income figure.

How does remortgaging work for the self-employed?

Remortgaging for the self-employed is identical to remortgaging for someone on a straightforward PAYE income. The products are the same and if you’ve got at least two years’ accounts you’ll have access to all the same ones. The only difference is that the lender will assess affordability based on your self-employed income.

How much can a self-employed person borrow?

Any lender will offer the same level of borrowing to a self-employed individual as they would to someone on the equivalent income in an employed position. There’s generally no difference in affordability assessment. 

The difference is in the calculation to arrive at that self-employed income, which can vary considerably from lender to lender. Almost all lenders will take a two-year average of your income assuming profits have increased over that period. If profits have increased in the most recent year, a small number of lenders will work off this year rather than taking an average. If profits have decreased they’ll use only the most recent years figures and want a good explanation for the reason. 

Lenders derive a sole trader or partnership income from the applicant’s personal tax calculation from HMRC. For limited company directors, most lenders will add the director’s salary and any dividends received together. These will be itemised on the managing director’s tax calculation as their personal income. Some lenders will ignore dividends, however and instead look at limited company profits plus the director’s salary.  

That can be beneficial for directors that may have not taken a dividend. If the company made a profit they might choose to leave that money in the company to grow the business. In that situation the lender will look at the company accounts to come up with an income figure.

Typically speaking, lenders will lend around 4.5 times your income. In certain niche circumstances they may go higher to say 5.5 times. These calculations are underpinned by a very complicated affordability assessment that’s unique to each lender. They might lend less due to things like the age of the client, existing credit commitments, their credit score and the size of the deposit. It can get quite confusing, and that’s why it’s so helpful to work with a broker.

What documents do I need when applying for a self-employed mortgage?

It certainly helps us if you are prepared. The SA302s we referred to earlier are useful, although with digital tax they’re becoming a thing of the past. They were issued by HMRC when you submitted paper-based tax returns. We need your tax records for at least the last two year and in some cases the last three years. There’s also something called a “tax year overviews” that’s printable from the HMRC website. We need that for each year too.  

If there’s a limited company involved, we need the last two years’ signed accounts.  Lenders want them to be signed by a qualified accountant. 

You should also pull together six months of business bank statements and three months’ personal bank statements. You will also need your passport and driving licence to prove who you are, plus a utility bill dated within the last three months to prove where you live. If you get all that together for us then that should be the majority of what we need.

What other advice do you have on self-employed mortgages?

Whenever the company year ends or your personal tax year ends, get your accounts finalised as soon as possible. If we are six months past the year-end date for your company, lenders will expect to see that information. 

A lot of people don’t have it ready. They end up waiting till the following January, just before the tax is due. But if you need those figures for a mortgage you will end up waiting for your accountant – it could mean you miss out on a property you like or a product if it’s withdrawn in the interim.

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

The Financial Conduct Authority does not regulate some Buy to Let Mortgages.

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