Being self-employed does not automatically make it harder to obtain a mortgage. The real difference is how income must be demonstrated.
An employed applicant may provide payslips and a P60. A self-employed applicant often has several figures that could be described as income, including turnover, net profit, salary, dividends and retained company profit.
Different lenders can interpret these figures differently. This means that a self-employed applicant rejected by one lender may still meet the criteria of another.
The key is to understand how the business is structured, prepare the correct documents and approach lenders whose criteria suit the applicant’s circumstances.
How long have you been self-employed?
Trading history is important because lenders want evidence that the income is established and sustainable.
Many lenders prefer applicants to have two or more completed years of accounts or tax returns. Some may consider an applicant with only one full year’s figures, particularly where there is strong evidence of previous experience in the same occupation or industry.
Applicants with a longer and more consistent trading record will usually have access to a wider choice of lenders.
A recent move from employment to self-employment does not necessarily prevent an application, but it can reduce the available options. Starting the mortgage conversation before making an offer on a property can identify whether the trading history is likely to be sufficient.
Sole traders and business partners
For a sole trader, lenders will normally focus on taxable profit rather than turnover.
Turnover is the total income received by the business before expenses. It does not represent the amount available to the applicant personally.
Lenders may examine the applicant’s share of net profit, often using information shown on tax calculations and tax-year overviews. Business accounts and bank statements may also be requested to support the figures.
Where the applicant operates through a partnership, the lender will usually consider their individual share of the partnership profit rather than the total profit generated by the business.
The precise calculation differs between lenders, particularly where income has risen or fallen substantially.
Limited-company directors
Company directors can be assessed differently from sole traders.
A director may receive a relatively modest salary and take additional income through dividends. Many lenders calculate affordability using the salary and dividends drawn during the relevant accounting periods.
However, profitable companies do not always distribute all available earnings. Money may be retained within the business to support cash flow, purchase equipment, employ staff or fund future growth.
Some lenders may consider the applicant’s share of company profit or retained profit instead of relying entirely on salary and dividends. Their approach can depend on the applicant’s percentage ownership, the company’s financial position and the lender’s own criteria.
This distinction can be significant. Two lenders reviewing the same company accounts could reach very different conclusions about the income available for mortgage affordability.
Contractors and freelancers
Contractors and freelancers do not always fit neatly into employed or conventional self-employed categories.
Depending on the circumstances, a lender might assess income using:
- Completed accounts or tax returns.
- A current contract and previous contract history.
- A daily or weekly contract rate.
- Evidence of ongoing assignments.
- Bank statements showing regular payments.
- Previous experience in the same field.
Some lenders have specific contractor criteria, while others assess the applicant as fully self-employed.
The length of the current contract, time remaining, gaps between contracts and history of renewals may all affect the assessment.
What happens when income changes?
Self-employed income rarely stays exactly the same every year.
Where profits are stable or increasing, a lender may average income across two or more years or use the latest available figure. Where income has fallen, the lender may use the most recent lower figure and ask for an explanation.
A single difficult year does not always prevent a mortgage, particularly where there is a clear commercial reason and evidence that the business has recovered. However, the lender may want to understand whether the problem was temporary or indicates a continuing decline.
Applicants should be prepared to explain:
- Unusual one-off expenses.
- Changes in business structure.
- A period of illness or parental leave.
- The loss or addition of a major client.
- Changes in trading location.
- Recent business growth.
- A significant difference between turnover and profit.
Clear supporting information can be valuable, but it does not override the lender’s affordability or underwriting rules.
Documents a lender may request
Preparing the evidence before applying can prevent unnecessary delays.
Depending on the business structure and lender, the applicant may need:
- Two or more years of finalised business accounts.
- SA302 tax calculations.
- Corresponding tax-year overviews.
- Personal bank statements.
- Business bank statements.
- Proof of identity and address.
- Evidence of the deposit.
- Details of existing loans and credit commitments.
- Current contracts or evidence of future work.
- An accountant’s certificate or reference.
- An explanation of substantial changes in income.
HMRC allows taxpayers to obtain SA302 calculations and tax-year overviews after submitting their Self Assessment returns. Applicants should make sure the figures supplied to the lender are consistent with the accounts, tax records and bank statements.
Unexplained inconsistencies can delay an application or lead to further questions.
Tax efficiency and mortgage affordability
Self-employed applicants understandably want to manage their businesses tax-efficiently. However, the income shown in tax returns and company accounts can affect the amount a lender is prepared to offer.
For example, claiming legitimate expenses may reduce taxable profit. Retaining earnings within a limited company can also mean that salary and dividends do not reflect the company’s full profitability.
This does not mean an applicant should change valid tax reporting purely to obtain a mortgage. Financial, mortgage and tax decisions should be considered together with appropriately qualified professionals.
Speaking to a mortgage adviser before the next accounts are finalised can help the applicant understand how different lenders may interpret the figures. Any tax decision should still be discussed separately with an accountant or tax adviser.
The lender will assess more than income
Demonstrating income is only one part of the mortgage application.
The lender may also consider:
- The applicant’s credit history.
- Loans, credit cards and vehicle finance.
- Regular household expenditure.
- Dependants and childcare costs.
- The size and source of the deposit.
- The requested mortgage term.
- The property being purchased.
- The effect of possible future interest-rate changes.
A profitable business does not automatically guarantee that the requested mortgage will be considered affordable.
Common mistakes to avoid
Self-employed applicants can strengthen their position by avoiding several common problems:
- Applying before the latest accounts or tax documents are available.
- Assuming every lender calculates income in the same way.
- Using turnover as though it were personal income.
- Failing to disclose existing borrowing.
- Allowing accounts and tax documents to show conflicting figures.
- Taking out new credit during the mortgage application.
- Leaving explanations of unusual income changes until underwriting begins.
- Making repeated applications to unsuitable lenders.
Preparation and appropriate lender selection can be just as important as the income figure itself.
Let NetRent help you prepare
NetRent Mortgage Solutions works with DNA Financial Solutions to provide access to independent mortgage and finance advice for self-employed applicants, company directors, contractors, landlords and homeowners.
Understanding how a lender is likely to assess your income before submitting an application can save time and reduce the risk of approaching an unsuitable lender.
If you are self-employed and considering a purchase or remortgage, call 01352 721300 or email mortgages@netrent.co.uk.
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Mortgage products, interest rates and lender criteria can change without notice. Individual circumstances vary, and appropriate mortgage, financial, legal and tax advice should be obtained before making a decision.
Your home may be repossessed if you do not keep up repayments on your mortgage.