Plus: What 'self-employed' mortgages are and why lenders have such difficulty approving them
If self-employed, you are more likely to encounter issues when applying for a mortgage. You need to know up front, however—it is possible. Here’s how.
Understanding self-employed mortgages
Technically, there is no such thing as a self-employed mortgage, as there are no specific self-employed mortgage products on the market. Self-employed and employed applicants alike have the same access to apply to the wide range of mortgage products. The major difference is that your stated income in your self-employed mortgage application is assessed differently by mortgage lenders.
However, self-employed business activity continues to be seen as less stable by many large, mainstream mortgage lenders—even though there continue to be more and more self-employed workers in the United Kingdom. One reason this may still be the case is that self-employed incomes typically fluctuate, whereas a PAYE-employed person has a basic salary. To mitigate the risks from the fluctuations in self-employed incomes, lender ask those applicants to provide evidence of 2-3 years of stable income. Lenders use the average of those years to calculate your basic salary.
Why do lenders find it difficult to approve mortgages for the self-employed?
Lenders find it difficult to approve mortgages to people who are self-employed based on this assumption: that self-employed borrowers are at a much greater risk than those who are not—and therefore at a much greater risk of defaulting. Certain lenders—such as large, mainstream operators in many cases—operate two different affordability calculators. The calculator for self-employed automatically ‘receives’ a loan that’s 15% lower than that allowed for their employed counterparts.
When certain lenders suggest that self-employed borrowers are at ‘more chance of defaulting’, there is very little information or data to back it up. The reality is that even employed borrowers whose work could be considered at-risk throughout the COVID-19 pandemic—such as airline worker or those in the hospitality or retail sectors—are given a pass, seemingly without a second thought. In other words, if you are not on furlough, and have at least three months of payslips, most lenders will be happy to lend. If you are self-employed but work in a much more stable sector, on the other hand, you are likely to find yourself in a very different situation.
How many years do you have to be self-employed to get a mortgage?
Most lenders will require that you have 2-3 years of stable income from self-employment to give you a mortgage. Certain lenders could even consider your mortgage application with two years trading accounts and the associated tax calculations. Generally, mortgage calculation can be achieved based on an average of two years’ net profit. Lenders are more likely to be accommodating if there is a greater equity value or deposit.
What proof of income do I need for a self-employed mortgage?
In 2022, lenders want to see much more proof of income and affordability than in the past (think: pre-2014). Proof and income you will need when applying for a ‘self-employed’ mortgage typically include certified accounts for at least two years. You should also provide evidence of your earnings from HMRC, Form SA302, as well as proof of upcoming work, such as contracts if you are a freelancer or a contractor. Also, if you are a company director, you will need to give proof of dividend payments or retained profits.
Even though most lenders require you to be self-employed for two years minimum, some may grant you a mortgage if you have one year of accounts. In that case, however, you will likely have to show that you have a lot of work coming up in the future. And know, as well, that even then your options could be limited.
How self-employed mortgage applications can be approved
If you are a self-employed mortgage applicant, you will want to prepare for your application in advance—it may be critical to securing a mortgage offer. Here are some ways you can prepare before making your application.
Improve your credit score. All applicants will have to undergo a credit check, which essentially means the higher your score, the better. You can improve your credit score by ensuring you are registered on the electoral roll at your current address. Repaying any existing debts and maintaining timely credit card payments and utility bills will also help your cause. Finally, you will want to refrain from taking out additional credit, and make sure you’re minimising use and staying within 50% of credit limits with existing credit arrangements.
Have complete documents requested. Beyond the accurate tax records you will likely already have—which should also make it easier to gather the proper, additional documents—lenders want to see form SA302.
Read more: How to get a mortgage for self employed clients
Provide a deposit. Depending on the product, the minimum deposit requirement for a standard residential mortgage is usually between 5-10%. To gain access to more competitive rates and more lender options, you will benefit from offering more than you can afford, even though there is no requirement for self-employed applicants to pay more on the deposit.
Have a financial preparation. It is important to use an accountant to help you with your mortgage application. A qualified accountant must certify accounts for tax years you will be submitting in support of your application.
Find a mortgage broker. While they will add to your overall costs, mortgage brokers will know exactly what lenders want to see and can assist you in finding the best deals. Some brokers actually take their fees from lenders, meaning they will not cost you extra money.
