A guide to self-employed mortgages in the UK

Why might being self-employed make it harder to get a mortgage?

Securing a mortgage may be more of a challenge if you’re self-employed (e.g. running your own business, or freelance).

Self-employed income is often less predictable and may also be less secure than a salary, so mortgage lenders need more reassurance that you can afford your monthly repayments in the long term.

You may therefore need to prepare more carefully if you’re self-employed, so that your mortgage application isn’t rejected.

Bear in mind that every rejected application can harm your credit score and make the next one more difficult, so give it your best shot the first time.

Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be for a self employed mortgage.

How will a lender class you as self-employed?

Lenders have specific definitions for different types of self-employment, and the one you fall into will determine how they assess your income.

You will generally be considered self-employed if you own more than 20-25% of a business.

Here are the main categories:

• Sole trader: You run your business as an individual and are personally responsible for its profits and losses. Lenders will assess your income based on your declared net profit, typically over the last one to two years.

• Partner: You own a percentage of a business with one or more other people. A lender will look at your share of the partnership's net profit to determine your income.

• Director of a limited company: As a director of your own registered company, lenders will usually calculate your income based on the personal salary you receive and the dividends you have drawn from the business. Some specialist lenders may also be willing to consider your share of the company’s retained net profit.

• Contractor: You work for clients on a contract basis, often for a fixed term or a set day rate. Some lenders have specific criteria for contractors and may calculate your annual income by multiplying your day rate over a certain number of weeks (e.g., 46 or 48), provided you have a strong history of consistent work.

How much can I borrow if I'm self-employed?

How much you can borrow depends on your proven income and your outgoings.

Lenders typically use an income multiple, offering to lend around 4 to 4.5 times your average annual income.

For example, if you can prove an average annual income of £50,000, you might be able to borrow between £200,000 and £225,000.

However, the final amount will also depend on a detailed affordability check.

The lender will look at your fixed monthly expenses, such as credit card payments, loans, and childcare costs, to determine how much disposable income you have left to cover your mortgage repayments.

Because lenders assess self-employed income in different ways, the amount you can borrow can vary significantly between them.

A good mortgage broker can identify the lenders who are most likely to view your financial situation favourably.

Is there such thing as a special type of mortgage for the self-employed?

You may have heard the phrase ‘self-employed mortgage’, but the truth is there is no special type of mortgage deal for self-employed people.

In principle you have the same choice of mortgages as a salaried applicant, although depending on your personal circumstances you may be offered a more limited range of deals, and may also face more stringent checks.

Tips on mortgages for the self-employed

Here are some guidelines for applying for a mortgage if you are self-employed, and how to maximise your chances of securing a good deal.

Can your spouse take the lead on the mortgage?

It might sound obvious, but if your spouse is salaried rather than self-employed, it can make more sense for them to be the first name on the mortgage, as their application may be more likely to be approved.

Even if their income isn’t quite as much as yours overall, the fact that it’s regular and predictable may count in their favour. Ask your mortgage broker about this option.

Show at least two years of accounts

In most cases you’ll need to provide at least two years of recent accounts – the most recent can be no more than 18 months old.

Hire an accountant to ensure the accounts meet the required standards, and ask him or her to explain the accounts to you in detail so you can speak confidently about them if questioned.

Some lenders ask to see an SA302 form (a confirmation from HMRC of the income you’ve reported to them) either instead of or in addition to your accounts.

These can take a few weeks to arrive, so request them in good time. You may also be asked to show some recent tax returns.

Increase your income if you can

When running a business, usually it’s good practice to retain as much profit as possible within it.

However, you may want to make an exception when trying to secure a mortgage.

Paying yourself a higher dividend of the profits can boost your application, and should also enhance your savings so you can afford a larger deposit.

Once you have your new home, you can readjust your income if you wish, so long as you can still afford the repayments and other outgoings.

Postpone major business changes

Lenders look for stability, so it may hinder your chances if you’ve only recently changed the structure or type of your business (e.g. from a sole trader or partnership to a limited company).

If you don’t want to delay that change, then give the new business structure time to bed down so that the lender can have confidence in it.

Make sure your lender is aware of the type of business structure you have, so they fully understand your level of income and how you receive it.

Be aware of the deposit bands

This tip is useful for all mortgage applications, but it can make an even bigger difference when you’re self-employed.

A larger deposit always means lower repayments, but there are also bands above which rates become even cheaper (typically 10 per cent, 25 per cent and 40 per cent deposit).

If you’re close to one of these bands, see if you can raise just a little bit more money to get past it – it’s usually worth the effort.

Remember that lenders often have different criteria

Why would one lender say ‘No way!’ and another say, ‘No problem!’? Because they may consider your earnings in a different way and take different income into account.

For instance, Lender A might focus on salary and dividends, while Lender B may base their decision on your operating profit and retained profits.

So if you get turned down by one, don’t despair – another lender may say yes without any changes to your income.

It’s good to consider this before you apply, to avoid the knock-back of a rejected application, so ask your mortgage broker to find the lender most favourable to your position.

Get specialist self-employed mortgage advice

Find a mortgage broker who has a lot of experience in finding mortgages for self-employed people.

A specialist can anticipate problems in advance and also source the most likely lenders for you from the whole of the market.

This reduces the risk of having your application declined. Although one declined application is unlikely to harm your credit score by much, a series of them might.

Seeing an adviser maximises your chances of being approved first time. Unbiased can connect you to the right mortgage broker for your needs.