Securing a mortgage when you are self-employed can feel more complicated than it should. Getting a mortgage as an employed person with a basic guaranteed annual salary might seem like the most straight forward and hassle free way of purchasing a property, but it isn’t always the case, and being self-employed can be a massive advantage to property buyers. Whether you are looking to buy your own home or invest in property with a buy-to-let mortgage, being self-employed often means jumping through a few extra hoops. However, with the right preparation, and expert advice, it’s absolutely achievable. In this guide, I’ll break down how self-employed people can get a mortgage, what lenders look for, and how a mortgage professional can help you make the process much smoother.
Who Counts as Self-Employed for Mortgage Purposes?
When it comes to mortgages, lenders generally class you as self-employed if you own more than 20-25% of a business from which you earn your primary income and/or if you work for yourself and pay your own tax and national insurance. There are a few main types of self-employed applicants:
- Sole Traders – Individuals who run their own business and are personally responsible for its profits and debts. Some examples could be a private tutor, a handman or woman, or a cleaner.
- Partnerships – Where two or more people run a business and share the profits (and liabilities). An example of this could be a law firm where two or more people work and are partners in the firm.
- Limited Company Directors – Business owners who operate through a limited company, usually drawing a salary and dividends. Often an accountant will handle a lot of the finances of the business to ensure that money is handled correctly and things like tax are calculated and paid properly.
- Contractors and Freelancers – Individuals working on short-term contracts or freelance projects rather than full-time employment.
Each type of self-employed person is assessed slightly differently by mortgage lenders.
How Mortgage Lenders Assess Self-Employed Income
One of the biggest challenges self-employed borrowers face is proving that they have a reliable income. Unlike employees who simply submit payslips, self-employed applicants need to provide more detailed financial information.
Here’s how lenders typically assess different types of self-employed income:
Sole Traders and Partnerships
- Net Profits: Lenders usually look at your net profits as declared on your SA302 forms or your tax calculation summaries.
- Evidence Required: Typically, you’ll need two to three years’ worth of accounts or tax returns. Some lenders may accept just one year, though options are more limited.
Limited Company Directors
- Salary and Dividends: Lenders usually consider your salary plus dividends to calculate your income.
- Retained Profits: Some specialist lenders will also consider retained profits (money left in the business) if you leave income in the company rather than drawing it.
- Evidence Required: Expect to supply your company’s full accounts, your SA302s, and tax year overviews for the past two to three years.
Contractors and Freelancers
- Day Rate Calculation: Some lenders will calculate income based on your day rate multiplied by the number of working days in the year (typically 46-48 weeks).
- Contract History: Recent contracts and a track record of continuous work can strengthen your application.
Self-Employed Mortgages for Buy-to-Let Properties
If you’re self-employed and looking for a buy-to-let mortgage, the requirements can differ slightly:
- Rental Income First: For buy-to-let applications, lenders primarily focus on the projected rental income from the property.
- Minimum Personal Income: Some lenders still require a minimum personal income (commonly around £25,000 a year), even if the rental income covers the mortgage.
- Limited Company Buy-to-Lets: More landlords are now purchasing rental properties through a limited company (Special Purpose Vehicle – SPV) for tax efficiency. If you do this, lenders will assess the company’s structure and your experience as a landlord.
Just like with residential mortgages, clear accounts and proof of personal income are crucial when applying for a buy-to-let mortgage while self-employed.
How to Improve Your Chances of Getting a Self-Employed Mortgage
Being well-prepared can make a big difference when applying for a mortgage. Here are some key steps you can take:
- Maintain Good Records: Keep your business accounts up-to-date and professionally prepared.
- Use a Qualified Accountant: Lenders often prefer accounts prepared by a certified or chartered accountant.
- Save a Larger Deposit: A higher deposit (20% or more) can improve your mortgage options and rates.
- Clear Personal Debts: Reducing outstanding debts can boost your affordability assessment.
- Strengthen Your Credit Score: Pay bills on time, reduce credit card balances, and check your credit report for any errors.
- Be Ready with Documentation: Have at least two years’ worth of SA302s, tax year overviews, and full business accounts ready to submit.
How a Mortgage Professional Can Help Self-Employed Applicants
Getting a mortgage when you are self-employed might require a little more effort, but it’s certainly not impossible. With organised finances, the right documentation, and expert guidance from a mortgage professional, you can access competitive mortgage deals, whether for your dream home or your next buy-to-let investment. If you’re self-employed and planning to apply for a mortgage soon, speaking to one of our experienced mortgage brokers at Oportfolio could be the smartest move you make.
Get in touch with our expert team today to discuss your options and find the perfect mortgage solution for your needs.
