Mortgages for the Self-Employed

Your home may be repossessed if you do not keep up repayments on your mortgage.

All information was accurate at the time of publication.

4th June 2024

This one is for all of the self-employed people out there. Just like you, I took the leap and went self-employed back in 2019 – and let me tell you, there's no going back to the traditional office life for me!

Being your own boss is awesome – you get the freedom, the flexibility, and the chance to truly own your work. (Plus, who doesn't love being the expert in their chosen field?).

But hold on, all that self-employed awesomeness can hit a tiny speed bump when it comes to mortgages.

We all rely on our amazing accountants to keep our finances shipshape, but sometimes that "income structure" they create can be a bit...confusing for lenders. (Raise your hand if you've ever had a mortgage hiccup because you're self-employed!).

Trust me, I've been there. That's why I've put together a list of common questions I hear from the self-employed and some examples to show you how lenders might assess your income and calculate affordability.

The truth of the matter is that each lender will assess your income differently and it also depends on how your business is set up. Some lenders will send an accountants reference out, some will look at your last two years tax calculations (previously called SA302s) and tax year overviews, some will look at your last two years signed company accounts, and some lenders will ask for absolutely everything. My job is to make your application as easy as possible, so I’ll speak to the lenders before making a recommendation to confirm just what it is that they will need. As standard, I’ll always ask for your accountants details, your last two years tax calculations and tax year overviews, and if you have a limited company, your last two years signed company accounts. Generally, the documents need to be within 18 months. I’m writing this at the beginning of June 2024, so today, the lenders would not be able to use documentation older than January 2023.

If you’re a sole trader, they’ll generally use an average of your last two years income from your tax calculations. If the latest year is lower than the previous year, they will use this instead.

If you’re a limited company director they’ll usually use an average of the last two years salary plus dividends, but we’ll come on to this more in a second.

As I mentioned in the introduction, I’ve been self-employed since 2019. Christmas 2019, to be exact. This meant that after leaving a cushy office job with a set income, I went out to be the master of my own destiny. 

The only problem was that in March 2020, Covid happened. I had a rainy day fund in case of emergency, but I just didn’t expect that emergency would be a global pandemic. 

This meant that my first year being self-employed wasn’t really what I expected from an earning point of view. There were plenty of silver linings, we didn’t have any staff to furlough and luckily all of my friends and family were relatively untouched by the virus. 

The problem was when I wanted to move in 2023 and the lenders were looking at my 2021 and 2022 figures, the 2021 numbers weren’t quite as high as I wanted. Being a limited company director, the lenders generally were looking at an average of the last two years salary plus dividends. This meant that the majority of lenders couldn’t lend me enough as I would like, despite knowing myself that I could afford a certain level of mortgage. I knew what my own personal budget was. 

The good news is that there are a number of lenders who can help in this scenario and for myself specifically, Coventry Building Society were able to consider the latest years figures. They did reach out to my accountant and ask them to complete an accountants reference. This confirmed to the building society what I had earned and that the business was solvent going forward. Long story short, Coventry gave me a mortgage offer and I was able to move home, with them using my latest years figures.

Similar but different to the above question, we often get enquiries from people who have taken the leap and gone self-employed, but don’t have two years worth of accounts or tax returns yet. The good news is that the biggest lender in the UK, Halifax, are able to help!

Halifax have a very automated system, which means that there are very few points in the application where a human will look at your numbers. This is good news for people with only one years numbers as they will simply look at profit from self employment on the tax calculation or salary plus dividends for limited companies and use 100% of this figure.

HSBC are also a good lender for one years accounts, especially if there are more than one applicant. They will still take an average of the last two years, but they treat the first year as £0. This really means they’ll use 50% of the first years figures, which makes it more useful if there are two applicants and the other applicant has a good income. I found that a bit confusing to write, so again, if you have any questions about only having one years accounts, let me know and I can complete my research and give you some answers.

Limited company directors is more difficult. There are several ways your income can be assessed. Most lenders will simply take an average of the last two years salary, plus dividends. They will get the salary from the directors renumeration on the trading and profit and loss account from your signed company accounts.

Some lenders will look at salary plus profit before tax, or salary plus profit after tax.

Some lenders will look at salary plus retained profits. This is especially useful when you are the sole director and only take the money out of the business that you need. Why would you pay tax on taking money out of the business if you didn’t need to? They will simply look at retained profits on the balance sheet.

Again, some lenders will just write out to the accountant and ask them to confirm your income.

When I do my research, I will speak to the lenders about your business and provide them with all the information to make sure that my recommendation is correct and that the application will be as smooth as possible.

It’s always worth prompting your accountant as it can take them a few days to put information together for you. If you’d like me to liaise directly with your accountant, I’d be happy to do this.

If you have a traditional 9 to 5 job, but also have a side hustle which is classed as being self-employed, there will be lenders out there who can help, but I will need to run this past them first to make sure they are happy and to confirm what documentation you will need to provide.

I'd spoken to my client about them buying their first home, but we needed to wait until his next set of accounts had been produced before we could proceed. A few days later he came back to me to say he'd found his dream house, he'd put an offer in and it had been accepted. I then had to work my magic and find a lender that would use his tax calculations and tax year overviews, rather than his signed company accounts. When I put the question to Nationwide they said that they can either go for an accountants certificate, or tax calculations. They're happy to use either the tax calculations or year end accounts, as long as the most recent years figures are within 18 months. 

This means that if you've just produced your tax calculations and tax year overviews in April 2024, we can use these as proof of income, even if your 2024 year end hasn't happened yet.

This is another situation that has happened to me personally. 

My previous mortgage was with Santander and when I wanted to move home, I spoke to them about taking my mortgage with me. 

As a mortgage advisor, I basically have a sales job and get paid on the amount of mortgages I write. (I hope none of this comes as a surprise).

We had different shares, A, B, C and D so we could pay ourselves depending on the amount of business we had produced. 

When I spoke to Santander, they said that unfortunately, as we both had equal shares, they would look at the business as a whole, rather than what I had earned individually. This meant that as my business partner didn't write as much business as me, we were unable to proceed with Santander. 

The good news, as I mentioned at the top of the blog, is that Coventry Building Society were able to use some common sense and looked at my income only. 

If you are a director and don't have 100% of the company shares, there will be options for you, but not all lenders will be able to look at your income independent of the other shareholders.

The age old question of how much can I borrow. 

Very short answer, 4.5 to 5 times your income. 

The longer answer is that it varies from lender to lender. 

The best thing to do is get in touch as early as possible and we can run your numbers through an affordability calculator and discuss what each lender will be able to offer. 

As I've mentioned throughout this blog, it will depend on how the lender assesses your income, what debts you have outstanding, how much of a deposit you are looking to put down and how long you want the mortgage over.

Being self-employed, you can't really just find an online calculator yourself and fill it in, as there are so many variables, the answer might be too generous, or on the other side, too restrictive. 

We'll take the hard work out of what you can borrow.