Updated 27 May 2022
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.
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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.
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.
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.
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.
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.
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.
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.
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.
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.