Self-employed mortgage guide
We explain what you need to get a mortgage or remortgage when you're self-employed
Being self-employed has become more common in the past few years, as 15.1% of the UK workforce are in that category. (1)
It’s not surprising therefore that lenders are getting better at dealing with that segment of the population – otherwise they’d be missing out on plenty of perfectly good business.
While it’s easier if you’re employed, the self-employed can still get a mortgage with many of the same high street lenders.
If you don’t qualify with the high street, there are a number of specialist lenders who have made lending to the self-employed a key part of their offerings for years.
What is a self-employed mortgage?
You’ll rarely find products designed for the self-employed specifically, so you’ll still take out the same mortgage as employed people.The difference is just that your income may be more complicated for lenders to assess.
Self-employed income is likely to fluctuate, so most lenders take a slightly more cautious approach when deciding how much you can afford to spend on your mortgage.
Can I get a self-employed mortgage?
For most lenders you only need to have been in an employed job for at least a month to get a mortgage. In some cases this could even be as little as not started in a permanent role but aiming to start in the next 3 months, with a contract of employment to prove it.
For those who are self-employed they can ask for up to three years of accounts. However, some only demand two years, or in some cases one year’s full accounts; so you should have some options even if you’ve been self-employed for a relatively short time.
If lenders look at two or three years of your income when deciding how much to lend to you, some will take an average income over that time.
Others base the maximum amount on the most recent year of trading.
How much the self-employed can borrow
The amount you can borrow depends on:
The size of the deposit
Your credit history
The maximum amount is usually calculated at around 4.5 or 5 times your annual gross income (i.e. the amount earned before paying tax but after deductions and expenses).
Like with any other maximum mortgage amount, the lender will ensure you can still afford to repay your mortgage if the Bank of England base rate rises, which would cause mortgage interest rates to go up. This doesn’t apply to fixed rate periods as the rate stays the same throughout.
What kinds of self-employed applicants are there?
There are a few types of self-employed applicant. Which one you are influences how lenders calculate affordability.
If you are a contractor, most lenders will analyse either the total contract value or your rate per day. With the latter approach they will multiply the day rate by five days a week and the number of weeks you’ve worked, usually around 48.
Some lenders will treat contractors as self employed limited company director rather than looking at contract value or day rate.
For sole traders they will analyse income using your declared taxable income as per your tax calculation (previously known as your SA302) and the corresponding Tax Year Overview.
Limited company director
For limited company directors lenders will typically look at salary and dividends, while some will look at salary and net profit (Net profits tend to be higher than dividends and dividends are taken from net profits).
If you are employed but earn some extra cash as a freelancer or with a part-time job, lenders may be able to take that into account when deciding how much to lend. This needs to be backed up with evidence and it depends on the lender’s policy. Two years of experience will need to be evidenced - though some lenders may accept one year’s worth.
Employed vs. self-employed
One problem is that freelancers and contractors tend to fall into the grey area between employed and self-employed.
Self-employment status is often based on how you pay your tax. Employed workers are usually paid through PAYE, where their tax is directly deducted, while self-employed workers will often fill out tax returns every year.
HM Revenue and Customs (HMRC) might see someone as self-employed for tax reasons, regardless of whether they identify differently in terms of employment law.
If you’re still unsure of your employment status, find more information here.
What documentation do I need for a self-employed mortgage?
If you’re self-employed and wish to apply for a mortgage, you’ll usually need the following:
Two years' accounts for a limited company. Two years accounts, 2 years' HMRC Tax Calculations (or SA302s) and tax year overviews for a sole trader and limited company.
A track record of regular work (if there’s a decline in income, the lender will want to understand why)
A good credit history (especially if you’re going with a high street lender)
For contractors - a signed contract stating day rate etc.
It can be prudent to have your accounts prepared and certified by a chartered accountant, although the need for this can depend on the size and threshold of the company. For example, sole traders will often complete their own Tax Calculations and Tax Year Overview.
What is an SA302 (Tax calculation)?
When applying for a mortgage, you might be asked for your SA302.
An SA302s (being phased out in favour of Tax Calculations) is an HMRC certified document that gives evidence of self-employed earnings.
The SA302 summarises the income reported to HMRC and is effectively a certificate that documents how much income you’ve declared. It’s a simple way for lenders to verify the income figure you’ve declared on a mortgage application.
If you have an accountant, they’ll usually complete one on your behalf. If you file your own tax return online, you can find the SA302 in your HMRC online account and print one off.
If your lender won't accept printed documents, you can call HMRC on 0300 200 3300 and ask them to send one in the post.
Recently, lenders also accept a tax computation if generated from an accounts system - so it doesn’t have to be HMRC. However, tax year overviews will have to be received from HMRC.
How can I increase my chances of getting a mortgage?
For all applicants, the main factors that will increase the chances of getting a mortgage are deposit size, credit history, and income. If you’re self-employed, these can be especially important.
Having a deposit of at least 10% of the value of the property is generally required, but some lenders will allow a 5% deposit - and if partnered by a strong credit history should serve to improve your chances.
If you’re a director of a limited company and keep some of your profits in the business as opposed to taking it all as salary and dividends, you’d benefit from finding a lender who will take these 'retained earnings' into account as part of their calculation
Speak to an expert
We recommend speaking to a mortgage broker who will be able to properly assess your options.
Getting a mortgage as a self-employed borrower needn’t be a minefield but it’s a little more complicated than if you are employed.Rest assured, however, that plenty of mortgage lenders couldn’t be happier to lend to you.
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Your home could be repossessed if you don't keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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(1) Office for National Statistics, January to March