Mortgages for the Self-Employed

Ever been told your mortgage is complicated because you’re self-employed? Well, it’s a bit like being told subtraction is harder than addition. Yes, it’s true, but they’re both basic, fundamental skills just as being an expert in self-employed mortgages is to any broker worth talking to.

Before we get going, let’s just dispel the myth now that you need to have been self-employed two years before you can apply for a mortgage. This simply isn’t true. There are several lenders who will give mortgages to those who have been self-employed just one year – offering competitive rates too.

If you’re employed, a bank will verify your income using payslips. If you’re self-employed, they’ll need accounts or tax calculations (formerly SA302s) and tax year overviews. It’s just different documents and that’s it. Issues only arise if income isn’t declared, documents aren’t in order or tax bills are outstanding.

For directors of a limited company a bank will class you as self-employed if you own more than 20-33% of the business, the exact amount depending on the bank. Most commonly, 25% is used as the line between employed and self-employed.

So the documents the bank will need…

This is different depending on the bank we go to as different banks assess self-employed people differently. Some will use salary and dividends – the latter obviously only being relevant for limited company directors – and some will use net profit (always before tax). At the time of writing this, there is at least one lender who will also use net profit and salary combined too. A lender using only net profit will need the accounts to verify these figures whereas a lender using salary and dividends may need tax calculations and tax year overviews as well or instead.

Knowing how a lender will assess you is crucial before applying and this is one of the many areas we can help you. If you’re taking a six-figure salary out your business but your net profit is zero, there’s no point you swaggering into a bank who uses net profit figures because as far as they’re concerned, you’re not for them. The worst thing you can do here is go through a full application and then get rejected. One hard search too many on your credit file could cause a bank who would have lent to you before to think again.

From our experience, self-employed people are more familiar with their year-end accounts than with the tax calculation and tax year overview documents. A tax calculation is a sort of summary page of your full tax return and provides a breakdown of all your income after the end of each financial year. It also provides a breakdown of your tax liability for the year. A tax year overview confirms how much tax you have paid. These documents need to show the same figure to satisfy the mortgage lender. If you’re unsure of how to get these, get in touch with us or ask your accountant if you have one.

In some cases, lenders may request further documents to the above. For the self-employed, this may be an accountant’s reference and business bank statements. If net profit figures for a business are declining, they often ask for an explanation of this to ensure your income is sustainable too.