First off, it's worth pointing out that there's no such thing as a self-employed mortgage. You might have come across the term 'self-certification mortgage'. However, these were abolished in 2014. As a self-employed person, you're entitled to apply for the same type of mortgages as those who are employed. The main difference is in the type of information you need to give to the lender.
Whether you're self-employed or employed, the main thing a mortgage lender wants to know is that you can keep up with the mortgage repayments. It's up to you to prove it - and this can be more difficult when you're self-employed. Employed people are usually asked to prove three to six months' worth of income, which they can do by sending over their payslips. If you're self-employed, lenders typically want proof of income for the last two, or even three, years. So, if you've only been self-employed for one year, finding a mortgage could be extremely difficult.
Most lenders will want to see at least two consecutive years of accounts, plus your bank statements. If you're a sole trader and you do your taxes yourself through the HMRC self-assessment website, you should have a document called SA302. This shows how much income you received and how much tax was due that year. Many lenders will want to see your SA302s alongside any other proof of income.
For self-employed people operating as a partnership, you'll usually need to provide accounts showing which portion of the business income belongs to you. Those operating as a limited company will need proof of income as a director and proof of any dividends paid to you as the majority shareholder.
When a lender is deciding how much they're willing to lend you, they'll base your income on an average of the last two to three years of net profits before tax. However, if your income appears to fluctuate wildly, this may raise a red flag. You might be able to reassure the lender by providing the following documents:
One way of increasing your chances of being approved is to put forward a bigger deposit. In general, you should aim to have a deposit worth at least 20% of the property value. However, if you can save a deposit of 40%, this might give you access to better deals and make you more appealing to the lender. On a £250,000 house, a 20% deposit would equate to £50,000 and a 40% deposit would equate to £100,000. Bear in mind that even if you have a large deposit, the lender is still legally required to make sure you can keep up with the repayments. And that means proving sufficient income and having a good credit rating.
Although specific self-employed mortgages don't exist, some lenders look more favourably upon self-employed people than others do. A mortgage broker can provide advice on which lenders are willing to lend to self-employed people, whether they take into account retained profits, and how much they’re likely to lend. They can also search the market for the right deal for your individual circumstances.
If you're self-employed and would like advice on securing a mortgage, please get in touch. You can request a callback or call us on 03300 583 859 to find out more.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.