Self-Employed Mortgages

Insights from the Experts

The dream of entrepreneurial freedom is one that a lot of us share – in fact, just over 15% (over five million) of the UK’s working population is currently self-employed. However, despite this way of working being on the rise, it can be an arduous task for a self-employed borrower to secure a mortgage – and this largely comes down to proving income and affordability.

Can I get a mortgage if I’m self-employed?

The short answer is yes, you can secure a mortgage if you’re self-employed. It’s just slightly more convoluted than if you were in full-time employment. Our mortgage advisers fully understand the complexity of underwriting a mortgage for a self-employed client and can help negotiate the right deal for your circumstances.

Let’s look at the challenges you may face when securing a self-employed mortgage, how it affects the mortgage options available to you, and how you can overcome these obstacles to achieve the ideal property finance solution to suit your needs.

Why is it harder to get a self-employed mortgage?

Even if your self-employed income is stable, many lenders will still see it as having the potential to fluctuate or change, and this constitutes a level of risk that may give them concern as to your affordability for a large loan. Whereas a full-time employee can easily demonstrate their income through payslips and contracted salary, it’s sadly not as straightforward for self-employed applicants and, as such, the assessment criteria for self-employed professionals varies greatly from lender to lender in the UK mortgage market.

Plus, self-employed income can often come from a number of different sources – whether that be differing contracts, foreign currency, rental income, bonuses, dividends, or shares – adding a further layer of complexity to your application and making it difficult to secure a mortgage at a desirable rate.

In essence, it all comes down to your ability to clearly demonstrate your income and affordability, being prepared with paperwork ready to go, and knowing which type of lender will be able to take a bespoke and holistic view of your case and financial profile.

Does the type of self-employment affect an application?

There are many different types and structures of self-employment, and as a result, lots of different ways and mechanisms of demonstrating a self-employed client’s income. Dependent on your type of self-employment, lenders will have different requirements when it comes to paperwork and accounts in order to assess your affordability.

In order to best illustrate this, we’ve outlined some of the most common types of self-employment below, along with the respective ways their structures impact your ability to secure a mortgage:

Sole traders

Sole traders are the simplest of the self-employed pack to understand. Essentially, a sole trader is someone who runs their business as an individual – there is no legal distinction between the owner and the business. Just as straightforward as the concept is to comprehend, the lending process is rather straightforward too. Lenders will typically use your net profit figure to determine how much you can borrow, via tax calculations, as well as reviewing your accounts if you produce them.

Contractors

A contractor is a person who manages their business through the use of contracts, whether that be through an agency or directly with other companies. If you are a contractor who works on fixed-term contracts (for example, over six-month or twelve-month terms), lenders may accept these to satisfy their affordability criteria. If, however, you are a contractor who works on a rolling project basis with multiple clients, you can expect to be asked to share your company accounts as well as your ongoing contracts to help the lender assess your proof of income.

Limited Company

A self-employed person who works through a limited company is distinct from a sole trader in that they operate through a business that is a separate legal entity. The individual will have shares in the company and most likely be a director and employee, drawing their income through a combination of salary and/or dividends. This is where affordability criteria can be a real issue as the way in which you draw money from the limited company will dictate the way lenders review your case and assess your affordability.

There are a few options here of how lenders assess income. Many lenders will look at dividends and directors’ salaries in order to assess the amount of money you are taking out of the business. Some lenders will review your share of the net profit as well as your salary to demonstrate the maximum you could have theoretically paid yourself, or they may even consider directors’ loans and shareholders’ funds.

Typically, lenders will want to see at least three years of financial statements, others will accept two, and in certain circumstances, a limited number will accept one years’ worth of accounts.

Partnership

If you have set your business up with others via a limited liability partnership (LLP) and are acting as a partner within the business, lenders will usually review your net profit figure and use your percentage of the business as your share of income.