There are more than five million self-employed people in the UK, according to the Office for National Statistics (ONS). Yet getting a mortgage when you work for yourself can be more complicated than if you’re an employee working for a company.
Can I get a mortgage if I am self-employed?
You can get a mortgage if you work for yourself. However, lenders prefer job stability and the predictability that comes from a reliable income.
If your income tends to fluctuate from month to month – as it often does if you’re self-employed – lenders may be more nervous about letting you borrow. Because of this, you’re likely to need to provide more evidence of your income to get accepted for a mortgage.
How to apply for a self-employed mortgage
If you’re applying for a self-employed mortgage, you will need the following documents to prove your income:
- Two or more years of certified accounts
- SA302 forms or a tax year review from HMRC for the past two to three years
- Evidence of upcoming contracts if you’re a contractor
- Proof of dividend payments or retained profits if you’re a company director.
You’ll also need:
- Bank statements for the past three to six months
- Proof of ID, such as your passport or driving licence
- Proof of address, such as a council tax or utility bill.
How does affordability work?
The introduction of the Mortgage Market Review (MMR) back in 2014 meant that lenders must now comprehensively check whether you can afford a mortgage, both now and in the future too.
As part of this assessment they will “stress test” your finances to see whether you would still be able to afford your mortgage if interest rates were to increase (to 3% above what the lender’s mortgage deal reverts to).
To ensure you won’t be overstretching yourself, lenders will look at both your income and how you spend your money.
Your bank statements will be examined to assess how much you spend on household bills, childcare costs and commuting. Lenders will also consider how much you spend on holidays, socialising and hobbies, as well as whether you have any debts to repay and how much these are.
Do all lenders want the same?
Although lenders must all follow the same rules, they won’t all have the same criteria.
This means that where one lender might turn you down, another might accept your application. For this reason, it’s important to check eligibility criteria carefully before applying.
You may also want to seek help from a mortgage broker.
Should you use a broker?
There’s no requirement to use a mortgage broker to help you with your mortgage search. But, especially when you are self-employed, it can help to ensure you’re matched with the most suitable lender and deal.
Brokers have inside knowledge of each lender’s criteria and preferences, which can ensure you don’t waste your time applying for a mortgage you have no chance of being accepted for.
Brokers will also manage your application and arrange the necessary paperwork, which can make the process much easier.
Many brokers do not charge the customer a fee for their services, taking their commission from mortgage lenders instead. However, check they are independent and have access to the whole of the mortgage market rather than just a selected panel of lenders.
How your self-employed mortgage will be assessed
If you’re self-employed, your situation will generally fall into one of three categories, and this will affect how you’re assessed.
- Sole traders – if you’re a sole trader, you will need to declare your income using self-assessment and have your tax calculated by HMRC. You’ll need to submit this on a SA302 form which lenders will use when calculating what you can borrow.
- Partnership – if you’re in business with someone else, lenders will look at your individual share what profit it makes.
- Limited company – as a director of a limited company, lenders will look at both your salary and dividend payments when it comes to affordability. But note that not all lenders will factor in profits to their calculations, should you choose to retain any.
What if your business has suffered because of Covid-19?
In the wake of the Covid-19 pandemic, many lenders have tightened their criteria even further.
As a result, you may be asked to provide details of your turnover for the past three months as well as historic accounts so that lenders can see exactly how your earnings have been affected.
Applications are usually looked at on a case-by-case basis, and some lenders may be more lenient than others. Using a broker may help you to find a lender that is more likely to accept your application.
Are the same mortgages available to the self-employed?
These days self-employed people can choose from the same mortgages as anyone else, so there’s no such thing as ‘self-employed mortgages’.
Traditionally, however, ‘self-certification’ or ‘self-cert’ mortgages were available. These were specifically designed for those unable to provide proof of their regular income, making them a popular choice for the self-employed.
The Financial Conduct Authority (FCA) banned self-cert mortgages in 2014 due to concerns borrowers were being approved for mortgages they couldn’t afford to repay.