Genius Mortgage Guide to Self-employed Mortgages

Running your own business and being your own boss is stressful enough as it is, we appreciate that. Which is why we’re dedicated helping people understand their finances and giving the best advice possible. We’ve put this guide together so you’ve got one less thing to be stressed about. We’ve answered some commonly asked questions and if you have any further questions, we’re always happy to assist with your query. Let’s get down to it!

How do lenders define “self-employed”?

It may sound like a simple question for plenty but a valid question for sure. Limited company directors often pay themselves a “salary” as they are technically employed by the business. In some circumstances even a director who owns 15% of a company may not be considered self-employed by a lender. The definition can vary depending on the lender however in most circumstances, if you own more than 20-25% of a company and this is your main source of income, most mortgage lenders would consider you to be self-employed.

How is my self-employed income assessed?

This like in many scenarios, can vary depending on the lender. Depending on how many years of proof of income you have available, most lenders will take an average of either 2 or 3 years.

If you're a sole-trader, lenders will use your “net income before tax” figure when assessing income.

If you trade as a limited company, it's a little bit more complex. Most lenders will use your salary/dividends. However, some lenders can look at your share of net profit. This can be particularly beneficial if your business retains additional funds in the company as this figure will always higher or equal. If you don't leave any funds in your business at the end of the tax year, it won’t be beneficial to use lenders specifically who assess share of net profit.

Alternatively in every scenario for self-employed people, your SA302 (end of tax year documents) can be used, just like your accounts; lenders can use an average of your latest 2/3 years income.

What documents will lenders want?

Depending on your type of self-employment, lenders requirements can depend of course on how many years income they’ll be looking to assess. We’ve included some examples below, just keep in mind that every lender has varying document requirements, but most lenders will require the following:

Sole-traders

- Latest 2 years SA302s and corresponding tax year overviews (TYOs).

Limited company directors

- Latest 2 years SA302s and corresponding tax year overviews (TYOs).

- Latest 2 years audited accounts.

Contractors

- Existing signed contract

- Previous years signed contract.

- Latest 2 years audited accounts

- Latest 2 years SA302s and corresponding tax year overviews (TYOs).

This is not an exhaustive list of course as fewer lenders will be available if you’ve been self-employed for less than 2 years. If a lender is underwriting based on your SA302 figures, they may not need to see the audited accounts.

Is it more challenging to get a mortgage approved if you are self-employed?

Yes and no.

It’s a common misconception. Due to the nature of self-employment; many people offset their expenses against their income reducing their tax bill at the same time reducing your taxable income.. The other thing to note is the length of self-employment people have. Few lenders are available for people who have been self employed for just over a year and fewer lenders if less a year, making it a bit more difficult for some. For example, many employed applicants can get a mortgage with just one month’s employment however it would take a recently self-employed applicant just over 2 years to be able to access most lenders.

IIf I am buying a BTL property, will my self-employed income cause an issue?

Residential mortgages are more dependant on your main income due to you being the one who pays the mortgage and as mentioned in the previous paragraph, it can be more challenging for self-employed people.

Buy-to-let lenders are less concerned about income, many lenders on the high street have a minimum income of circa £25,000, there’s plenty of lenders however who don’t have this requirement so there’s plenty of options out there regardless of income.

Issues can sometimes arise with the length of self-employment however with BTL, many lenders are happy to consider one year’s proof of income, in rare scenario’s some lenders can accept borrowers who don’t have any income documents by using bank statements instead for the more recently self-employed.

The reason buy-to-let lenders are more lenient when it comes to personal income is due to affordability being calculated based on the property’s rental income.

BTL lenders will require the rental income to confirm how much they will lend, always keep in mind lenders will typically use the figure the valuer has provided on their assessment, not what it’s currently being rented at or what you think it might be worth,. For example, a BTL lender may provide a 5-year fix loan at 5% @125%, what this affectively means is the lender will need the rental income to be equal to or higher than the loan amount provided at an interest rate of 5% and then this is increased further by another 25%. So, the higher rental income of course, the more you can borrow.

Lender requirements can vary significantly in the market, but your broker will be able to give you further advice.

Some buy to let mortgages are not regulated by the Financial Conduct Authority

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE