Oxford accountants advise how to get a mortgage when you’re self-employed

The UK has been facing a growing housing crisis since the 1980’s, and today, the trend shows no sign of abating due to various factors ranging from the rising cost of living to soaring interest rates and lack of affordable housing. Nevertheless, for those who are seeking to climb the property ladder, so long as you are well-prepared, it is certainly an achievable goal. If you are self-employed, you may be extra wary of the process due to the common belief that it is much more difficult to secure a mortgage due to your employment status. This article will shed light on how to get a mortgage when you’re self-employed, why many find it difficult, and explain why you may need help from an accountant.

Where can I find self-employed mortgages?

There are no longer mortgage products which are specifically for the self-employed, or even those who are sole directors of their own limited company. Instead, the mortgage products which are available on the market for anyone who is an employee are the same ones that you would be eligible to apply for.

Historically, there used to be mortgage products known as ‘self-certification mortgages’. They were hugely popular, especially amongst those who were self-employed (although not exclusively available to them) because, despite the higher interest rates, you could make an application by self-declaring your income without the need to provide evidence of it. Not surprisingly, many people abused the system – fraudulently inflating their income to borrow more and the mortgages were nicknamed ‘liar loans’. These products are no longer available as the Financial Conduct Authority (FCA) banned them in 2014. What’s more, the FCA then launched the ‘responsible lending guidelines’ which regulate that all lenders are responsible for ensuring applicants have the means to repay their loans.

What is the difference between getting a mortgage when you’re employed vs self-employed?

So, what is the difference between getting a mortgage when you’re employed vs self-employed and why is it more difficult to get a mortgage when you’re self-employed? Well, a lot of it has to do with the FCA’s responsible lending guidelines. It’s not necessarily the case that lenders are more reluctant to offer you a mortgage because of your employment status, but rather, it is not as straightforward for a self-employed person to provide the evidence and reassurance to lenders that they have the available resources to repay as it is for an employee.

When you’re employed, you’ll be paid via the PAYE system which reports in real time your earnings direct to HMRC. It also means that all your tax, your national insurance contributions, any pension contributions and student loans are automatically deducted from your gross earnings, and you then receive your take home pay. All this information is handily available to you via your regular payslips which you should receive (either digitally or physically) each time you are paid. If you have been working for a business long enough, then you’ll also receive an annual P60 form which summarises your earnings for the entire tax year. Providing payslips and/or a P60 form is solid evidence to lenders just how much you earn.

However, if you’re self-employed, you do not get paid through the PAYE system. Instead, you’ll receive income direct from your customers or clients and you’re responsible for reporting your own annual income each year to HMRC through a self-assessment tax return (or SA302 form). This makes it trickier for lenders to get a true picture of what you earn because they’re relying on an annual tax return compared to monthly payslips which clearly demonstrate a consistent stream of earnings. Therefore, they may often request other forms of evidence in addition to your SA302 such as copies of your business accounts.

If you’re a director of your own limited company, then you may have PAYE records if you pay yourself a director’s salary, but often you will only be paying yourself small amounts below the NI threshold and the rest in dividends to efficiently reduce your tax liability. Therefore, you shouldn’t rely on your payslips alone, because this may restrict the amount you can borrow. The good news is that lenders will consider both your salary and dividends as your income, but the bad news is that you’re likely to be subject to the same treatment as self-employed workers and therefore will need to provide additional documents as proof of income.

Are mortgages for self-employed people more expensive?

It’s a common misconception that mortgages are more expensive or have higher interest rates for the self-employed. As we’ve already explained, you will be eligible to apply for all the same mortgage products available to those who are in full time employment. The factors that go into your mortgage rates are not based on your employment status but will be more heavily influenced by your credit score and size of your deposit. The better your credit score and the bigger your deposit will usually mean the lower your mortgage rates.

Many people choose to use mortgage brokers to find the best mortgage deals for them. Of course, this does attract a fee but being self-employed does not mean it is mandatory for you to use a mortgage broker in order to secure a mortgage. In fact, many employed people will still choose to pay for a mortgage broker because of their expertise, service, and ability to find a wider range of mortgage products which are not readily advertised to the general public.

How much can I borrow if I’m self employed?

How much you’ll be able to borrow because you’re self-employed will be no different to how much you’ll be able to borrow if you were in full time employment. Lenders will ultimately look at your income, wherever that comes from, so one of your main priorities should be to ensure you can provide the evidence to prove this.

Most lenders will follow the general principle of offering up to 4.5 times your annual income, with some specialist lenders possibly stretching up to 5.5 times your annual income (but be prepared that you may have to pay a Higher Lending Charge). You should note that this is not simply 4.5 times your self-employed business turnover or limited company turnover, but actually lenders will calculate how much they’ll lend you based on your net profits (your profits after tax and expenses). So, bear this in mind before splurging on capital expenses such as new company cars or other equipment and business expenses.

For limited company directors, it may be prudent to check whether lenders will take into consideration retained profits in the company (especially if you have established your business for some years). Doing this will help you to avoid taking a big lump sum out in dividends (and therefore having to pay the tax on it) if it is not necessary to do so just to prove your income. If you are buying a property with another person, then you might want to explore the option of applying for a joint mortgage whereby both parties will be named and responsible for repayments. This will allow you to borrow much more as lenders will usually be able to offer up to 4.5 times both party’s annual income. Furthermore, if you are buying with someone who is employed, adding them to the mortgage application may help you secure a mortgage more easily because they’ll provide additional reassurance to the lenders.

How will lenders assess my affordability if I’m self-employed?

Although the standard expectation may be for lenders to offer 4.5 times your annual income, do not be surprised if they offer you less once they have assessed your affordability. Affordability is a significant factor that comes into play and can arguably be more influential on their decision than your ability to prove your income. This is because you only have to prove your income for the most recent past few years, whereas a mortgage agreement will typically last 25 years if not more. Lenders will therefore want to do their best to ensure you’ll be able to keep up with the repayments far into the future years.

Firstly, lenders will want to assess your affordability through stability of your income. When you’re self-employed, it’s not unusual to have high and low periods of earnings due to many reasons. For example, if it’s just you running the business and you have no other help, you may not be able to work whilst you’re on holiday or if you have to take time off because you’re unwell. Or, your business may be heavily affected by weather or the seasons which is beyond your control but may mean you can reliably see a boost in profits during the summer months that can see you through the winter months. This is unlike your employed counterpart, who will be receiving their agreed salary consistently each month. The advice from our team of Oxford accountants at Ridgefield Consulting would say that you can counteract any reservations lenders may have about inconsistent income if you can show a healthy cash reserve and stable cash flow that can support your expenses. 

Secondly, many lenders will also determine your affordability by stress-testing. This is often performed regardless of whether you are employed or self-employed. It was a particularly common practice when it was first implemented by the FCA in 2014 but has since been removed as a compulsory requirement in August 2022. It involved lenders considering whether you would still be able to afford your mortgage if the interest rates went up by a further 3%. Whilst it is no longer a strict obligation for lenders to perform stress testing as part of considering your affordability, many will still carry out some version of this as part of the responsible lending guidelines. 2022 and 2023 saw extreme spikes in the Bank of England interest rates which affected many homeowners. It has been predicted that less people will be able to afford their mortgages going forwards past 2023.

Thirdly, lenders will also likely take a detailed look into your outgoings to assess your affordability. When you’re self-employed, they’ll look into both your personal expenses and business expenses. Your personal outgoings will range from things such as if you’re financing a car, whether you have a gym membership, how much you pay for your mobile phone contract and your spending habits such as eating out and holidays. For your business expenses, they’ll be seeing if you need to pay rent, have any employees, and how much bad debt you may have from customers or clients who do not pay. It can feel intrusive for them to take a deep dive into your bank statements, but at the end of the day, they’ll be trying to determine whether you’ll be able to afford a mortgage without having to sacrifice your daily essentials.

What do I need to provide to secure a mortgage if I’m self-employed?

To be able to secure a mortgage when you’re self-employed, our advice would be to ensure you are adequately prepared. This means ensuring that you have the most up-to-date documentation and evidence to submit with your mortgage application. You will need:

• Proof of identity – lenders usually ask for two forms, with at least one form that includes a photograph of yourself. Common identification documents accepted in the UK include passport and driver’s license. More and more lenders are using sophisticated technology which will require you to upload your documents digitally as well as take a photograph of yourself in real time to upload or ask that you provide the documents in person to be verified.
• Proof of address – again, lenders may ask for two forms of proof of address. Commonly accepted documents include household utility bills, bank or credit card statement, driving license, payslips, entitlement to benefits letter or letters from HMRC. Be aware that often they will want these documents to be dated and be from within the past 3 months so ensure you have the latest copies.
• Proof of deposit – bank statements are the standard evidence used to demonstrate sufficient funds, but lenders may want more information with regards to how you have acquired the funds. Personal savings, the sale of another property or equity release are all acceptable (this is not a finite list). Where you’ve received money from an inheritance, lenders will ask for a signed document from the executors to confirm details and amounts (this can be obtained through the solicitors). Or, if you have received a gift of funds from family, this will also be accepted but lenders will want to see a formal letter declaring the amount given is to be treated as a gift rather than a loan.
• Proof of income – this is where you may need to rely on several different sources of documentation to provide proof of income. Firstly, ensure you have your latest SA302 (this shows your tax breakdown based on your most recent self-assessment tax return). Next, collate together your business accounts. We recommend an up-to-date profit and loss report as well as a balance sheet. One way to effectively pre-empt any reservations from lenders with regards to your business accounts is to provide signed accounts from chartered accountants (some lenders will insist on this). If you have any other income streams, such as rental income, be sure to supply this documentation as well such as a tenancy agreement with agreed rent.

Do I really need an accountant to get a mortgage if I’m self-employed?

The honest truth to this question is “it depends” and this is based on a number of different variables. Some lenders may simply be more stringent than others and insist on seeing business accounts signed off by a chartered accountant. Note that the important detail is that the accountant must hold a professional chartered qualification status as anyone can call themselves an accountant without formal qualifications.

Another variable may be your business structure. If you operate as a sole trader then you’re less likely to need accounts completed by an accountant, especially if your business transactions are fairly straightforward. It should be relatively simple for lenders to see the money coming into your bank account, the money leaving, and the tax you have paid on your earnings all through your bank statements and tax return summary. However, if you’re the director of your own limited company, then you’re more likely to need accounts completed by a chartered accountant. This is because your business finances are legally separate from your personal finances. Lenders will want to check that you are responsibly and legitimately extracting money from your company to fund your personal expenses.

Finally, a common variable is the amount of time you have been trading for. Where you have an established business lenders will have more data to determine your average earnings. Perhaps you can show you that you have been growing your business year on year, or even where you have had dips (perhaps due to Covid or similar external factors), you have managed to pull through. On the other hand, if you are only newly self-employed then you may struggle to secure a mortgage without signed accounts from a chartered accountant. In fact, most lenders will want to see a minimum of 2 years’ worth of accounts to consider most applications and often prefer at least 3 years’ worth. The less time you have been trading for, the more likely it is that you will need help from an accountant to get your mortgage.

Our accountants’ advice on getting a mortgage if you’re self-employed

The process of getting a mortgage when you’re self-employed can seem unfairly arduous, but don’t let this put you off. As we’ve said, the key to successfully obtaining a mortgage is to be thoroughly prepared and organised. For extra tips on getting a mortgage if you’re self-employed, our team of accountants share the following advice:

Don’t simply leave it up to the financial reports to do the talking when it comes to convincing lenders to offer you a mortgage agreement. Should you have any contracts of future work coming into your business over the next few years, be sure to provide these to your lender. It will help show them that you have a reliable stream of income coming in.

Do consider working with accountants in advance to applying for mortgages, even where lenders may not require that your accounts are produced by an accountant. This advice will be most relevant to limited company directors. A good accountant will help you reduce your company’s profits as much as possible (legitimately) in order to minimise your corporation tax bill; however this may not be in your best interest if you’re seeking to get a mortgage. Discussing your plans with an accountant in advance can allow you to devise a tax strategy to achieve your personal goals.

Don’t leave completing your self-assessment tax return to the last minute. This is crucial because, if you have not yet completed this step for the tax year in which you’re applying for your mortgage, you won’t be able to obtain your SA302 form. Don’t underestimate how long it may take to complete a self-assessment tax return either, even when you’re using an accountant to do this! You may be tempted to turn to an accountant at this point if you’ve found the perfect property that you’d like to put an offer on in order to quickly complete your tax return, but don’t forget to be realistic as most accountants won’t be able to drop everything just to get it done for you straight away.

Do be realistic about timings and be patient. If you are currently employed but are considering starting your own business (whether as a sole trader or setting up your own limited company), then it may be easier to secure your mortgage first. However, often people believe they can earn more money by working for themselves (as you get to keep all the profits after all!) and therefore get a bigger mortgage, but don’t forget that most lenders will not consider newly established businesses and will want at least two to three years’ worth of business accounts before feeling confident enough to agree to lend the funds.

Get help from our team of Oxford accountants if you’re looking for a mortgage

We hope this article was informative and sheds some more light on how our profession can help make the mortgage process a little easier. At Ridgefield Consulting, our team of accountants are keen not only to support your property goals, but your business goals as well. Use our contact form to get in touch and discuss your needs.