Self-Employed Mortgages

Podcast approved by The Openwork Partnership on 12/09/2024. 

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

If we’re comparing getting a mortgage when self-employed compared to when employed, then yes, unfortunately, it is harder in some ways. It’s more complex in the things you’d have to provide.

There’s a lot more information and history you’d have to evidence, which is the biggest difference when it comes to meeting lender’s criteria.

What type of mortgage can I get if I’m self-employed? Can I get a 95% mortgage if I’m self-employed?

As a self-employed individual, you’d still be looking at a standard mortgage application. The type of mortgage is the same whether you’re employed or self-employed. Unfortunately, some lenders do restrict the borrowing slightly for self-employed applications, and might require a minimum deposit of 10%.

They may also limit the salary multiples, regardless of the deposit amount. But the good news is there are other options available if you’re self-employed, and you could use a 5% deposit where standard criteria would apply.

How many years do you have to be self-employed to get a mortgage? Can I get a mortgage with only one year of self-employment?

The general rule list is two years minimum as self-employed. This is what almost all lenders would want to see. They want to make a judgement on the consistency of the self-employed income you’re receiving over a longer period than one year.

My most recent years earnings were less than my average. Will this affect my mortgage application?

Unfortunately, yes, it will likely have an impact. Lenders will look at your two most recent years of self-employed income, and if that income has increased year on year, they’ll usually take an average of the two to base affordability calculations on. Ultimately, what they’re determining is your income.

If your latest year is lower and not representative of your average earnings, they will take this figure only and not an average. A lot of self-employed individuals understandably find this quite frustrating.

The most recent year might be very out of sorts versus their normal income, but this is unfortunately what the lender is going to be looking at, regardless of whether we can evidence different earnings over a longer time.

How much can you borrow as a self-employed person? How many times my salary can I borrow for a mortgage as someone who is self-employed?

The majority of the time, affordability calculations are made in the same way as for an employed individual. The income calculated from the two most recent tax years will determine how much you could borrow. Different levels of income and deposit will unlock higher salary multiples.

A handful of lenders, regardless of the income or deposit for a self-employed application, will restrict the borrowing to their minimum amount of 4.5 times income. 

As a mortgage broker, we’re here to match your circumstances and plans with the lender to achieve your goals. 

What mortgage deposit do I need if I’m self-employed?

Unfortunately, there are some lenders that do require a minimum level of deposit for self-employed applications, usually at 10% plus. But this is more of an anomaly than the rule. A good number of lenders would accept an application with as low as 5% deposit for a self-employed individual.

How will you be assessed as a self-employed mortgage applicant?

The majority of your mortgage application will be assessed in the standard way. Credit scoring is the same for an employed or self-employed individual. The key difference is just what they’re looking at in order to calculate your income. 

For an employed individual, lenders usually just use the latest three months’ pay slips. But as a self-employed individual, we’d be looking back at two years’ worth of self-employed income. But once that figure is calculated and known, the rest of the application would just be treated in a similar way.

How will a lender calculate my self-employed mortgage earnings? 

They use the two most recent years of your tax returns and take an average of those if that figure has increased year on year. If that figure has reduced in the most recent year, they’ll just use that latest year’s figure as your income.

How do I prove my income? What documents do I need to apply for a self-employed mortgage? 

You will evidence the income you’re earning with your SA302 tax calculations, tax year overviews, and potentially your company accounts.

They’re the three things that you normally need to provide. Some lenders may need accountant certificates, but it’s not something unnecessary I suggest we get into. They’re the main three things that you would need to think about.

You may not have those to hand, but most of them are downloadable from the HMRC website, and they would be what the lender would need to see.

What else do we need to know before we return for Part Two?

The only thing that I would add is that a discussion with a mortgage advisor early is a good idea, to understand where you stand and where you might need to be before making a mortgage application. 

There’s quite a key difference between employed and self-employed individuals, with the history and evidence you have to provide. Understanding what you might need and how far back we might need to look allows you to make personal plans with the view of purchasing property.

We’re here to provide guidance on that – so speak to a mortgage broker as early as possible and we’ll be more than happy to help.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 12/09/2024.