Self-employed mortgages

Can you get a mortgage if you’re self-employed? In a word: yes. It’s slightly more fiddly than if you’re a full-time employee of a company. But with nearly 15% of the UK’s workforce now self-employed, if you can prove solid earnings and a decent income history, you should be able to access the same rates and deals as salaried employees.

How do you prove your income when applying for a mortgage?

If you’re self-employed rather than in standard full-time employment, things are a bit different when it comes to proving your income. There are a couple of golden rules. First, if you own a limited company, you need to get your income paperwork put together by an accountant – that way the lender can be fully confident that the figures you’ve put forward are accurate. Second, it’s important you understand these figures and your income history – because you’ll be asked about them by your broker.

Lenders will ask you for different information based on what type of self-employment you’re in (the exact requirements will vary from lender to lender).

If you’re a contractor or freelancer

You’ll need to supply your most recent employment contracts to show what you earn as a day rate. The lender will then average out the figures in your contracts over the course of a working year to produce an annual salary figure for you. You should also have your SA302s/tax calculations and tax year overviews to hand, as some lenders will insist on seeing them, and not having them limits your options in terms of which lenders you’ll have access to.

If you’re paid a day rate as a contractor or freelancer, this shouldn’t be a problem – you should be able to use both your SA302s/tax calculations and tax year overviews, as well as your contacts, to prove your income.

If you’re a sole trader or landlord

You’ll almost certainly need to provide your SA302s/tax calculations and tax year overviews for at least the last two years. Many lenders will accept tax calculations and tax year overviews that customers, or their accountants, have printed themselves from their HMRC online account, but double-check with the lender or your broker – paperwork delays are the biggest issue when it comes to a smooth mortgage application.

If you’re self-employed in a limited company

You’ll need to show your tax year calculations, tax year overview and the company accounts for the last two years. That way, lenders will be able to take into account both your basic salary and any dividend payments you get.

How much can you borrow if you’re self-employed?

The short answer is: it depends. Whenever anyone applies for a mortgage, the lender carries out an “affordability assessment” to work out how much to lend you – and whether they’re willing to lend to you at all. How much you can borrow will then depend on how secure the lender feels about lending to you and what your other spending commitments are. To test your ‘mortgageability’, they’ll look at:

How much you earn on average

If you’ve been contracting or freelancing for a few years, the lender will most likely tot up your income from each year and work out your average earnings. For example, if you earned £20,000 in your first year of contracting, £25,000 in your second year and £30,000 in your third year, the lender may assume that your average salary for the sake of the mortgage application is £25,000. Or, where your earnings have been incrementally increasing, a lender may base their calculation on your most recent tax year figure.

As a rule of thumb, if you’ve got a decent deposit to put down (say 10% of the property price) and your self-employed income is consistent and well-documented, you should be able to borrow around 4.5 to 4.75 times your gross annual income (ie your salary before it’s taxed).

How much your earnings have fluctuated

Fluctuating earnings can frighten some lenders and you might end up with a lower mortgage offer than you were hoping for. If your earnings have fluctuated massively or you’ve only been working for yourself for less than a couple of years, be prepared for lenders to use your lowest earning year as your salary figure for their affordability assessment. If you can explain a dip in earnings – say you had a baby or upgraded some equipment maybe – most lenders will be satisfied that you’re still a safe bet.

What your regular outgoings are

Mortgage lenders have to be able to prove they’ve lent responsibly, so they look closely at how much people can realistically afford to pay each month. Lenders want an idea of your personal and living expenses, which is why – even though some of this information can feel a little intrusive – you should be prepared to show any or all of these payments: - Evidence of credit card repayments - Evidence of any maintenance payments - Insurance contracts (buildings, contents, life, etc) - Any other loans or credit agreements - Household bills (water, gas, electricity, phone, broadband, etc) - Estimates of general living costs (spending on clothes, groceries, childcare, going out, holidays, etc)

How secure your income is

Lenders will want to stress-test your finances to check they’re future-proof. They do this to minimise the risk of you defaulting on your mortgage payments (like when they ask you about your regular spending). The lender needs to know you’ll still be able to afford your mortgage payments if interest rates suddenly shoot up or your situation changes – like if you take time off work to have a child or you’re forced into a career break.

Still in your first year of trading?

You most likely won’t be able to apply for a mortgage if you haven’t filled out a tax return for your first year of trading. That’s because from a lender’s perspective, you don’t have acceptable evidence of your income yet.

Without a first year’s tax return to analyse, lenders can’t really judge your affordability – even if you’ve had a brilliant first few months working for yourself. So you’ll need to be patient.

What is a mortgage in principle?

If you want to improve your chances of being accepted for a mortgage, you could apply for either a mortgage in principle (MIP) or an agreement in principle (AIP). These are statements you’ll get from either a broker or lender saying you should be able to borrow a certain amount of money, subject to further checks of your credit and the property you’re buying.

An MIP can boost your confidence when you’re making an offer and also make you a more attractive buyer to both sellers and estate agents. You could conceivably apply for a mortgage in principle as early as just before the end of your first year of trading.

Read more about mortgages in principle in our guide.

If you’re in a business partnership

Lenders will look at your share of the company’s profits if you’re in a partnership, so they can establish how much money you make – rather than how much money you and your partner make together.

You’ll need to make sure your accounts show this information clearly. And make sure you have your SA302s/tax calculations and tax year overviews to hand.

Why does having a healthy deposit matter?

If you’re self-employed, a healthy deposit will boost your chances of securing a mortgage.

Lenders look at your loan to value ratio (LTV) to help them decide whether to lend to you or not. The higher the deposit you can put down, the less risky you’ll appear to the lender.

LTV is the size of your mortgage as a percent of the total property value.

Example: Say you want to buy a property worth £250,000. You have a deposit of £20,000 already, so you need to take out a mortgage of £230,000.

That makes your LTV:

230,000 / 250,000 = 0.92

x 100 = 92%

The higher your deposit, the lower your LTV. So if you put down a 10% deposit on your home (without using any schemes to buy it) that’s a 90% mortgage, or 90% LTV.

Lenders also use LTV to assign interest rates – usually, the greater the deposit you can put down, the better the interest rates you’ll be able to access.

How do you make yourself credit-check worthy?

Credit scores: a quick refresher

Your credit record is the history of how you’ve managed your money in the past: a list of your accounts, like credit cards, phone contracts and utility bills, the amounts you owe and the dates they were started, and, crucially, any late or missed payments. It also lists any CCJs (county court judgements), repossessions or bankruptcies. This is all written up as your credit report, and summarised in one number: your credit score.

Before they agree to lend money to you, a lender will run a credit check on you to read your report and see your score. This will only ever be with your permission, and after they’ve already run their basic affordability checks.

If you have a business, lenders will do a credit check on both your business and on you as an individual. So make sure there aren’t any outstanding debts, and double-check that you’re not late with any payments to suppliers.

So having a good credit rating is key to a successful mortgage application. A bad credit rating will affect what interest rates are available to you – and whether you can get a mortgage at all.

Where to get your credit report

Before you apply for a mortgage, it’s a good idea to get a copy of your credit report and check it yourself. That’s because sometimes tiny mistakes in there, like a wrong address history, can pull down your credit score. But you can fix them before you approach lenders!

Credit reports are worked out by credit reference agencies, or CRAs. There are three of these in the UK – Experian, Equifax and TransUnion (previously CallCredit). It’s worth getting a report from all three, as each is worked out a little differently. A mortgage broker will be able to help you understand your credit report if that would be useful.

Once you get it, work through this credit score checklist to make sure your score is as good as it can be before you apply for a mortgage.

You can check your report as often as you like, it won’t affect your credit rating.

Should you use a mortgage broker if you’re self-employed?

Tracking down the right mortgage with the best rate is a minefield – even more so if you’re self-employed. Not all lenders’ criteria for self-employed mortgages is the same. For example, one might ask you to come up with three years of accounts before they even consider your application, while another might be willing to accept just two or even less. That’s where the expertise of a mortgage broker can really make a difference to whether you get approved or rejected.

A broker can help you navigate the range of options out there (just make sure they’re “whole of market”).

They’ll look at your specific circumstances, flag up what lenders might see as too risky, and help you choose which lender to apply with. A broker should make sure you only apply to lenders who are likely to accept you, and keep you away from those who won’t.

Plus, they’ll take a lot of the legwork out of the application process, and save you time and money too.

It’s definitely not compulsory to use one, but it can really help.

What are self-cert mortgages?

Self-employed workers used to be able to prove their income by applying for a self-certification (or self-cert) mortgage. This allowed hopeful homebuyers to ‘self-certify’ how much they earned in a given year – which effectively meant they could take out a home loan without having to actually prove their earnings on paper.

Dubbed ‘liar loans’ by the press, eventually the Financial Conduct Authority (FCA) decided that the risk of consumers being able to take on debt that they couldn’t afford to pay back was too great and self-cert mortgages were banned. Nowadays, self-employed people have to be able to prove their income just like everyone else.