The UK has seen a rise in those choosing self-employment, specifically running small businesses, freelancing, or contracting. That’s a wonderful thing for flexibility and freedom, but when you’re applying for a mortgage, being self-employed can make things quite complicated.

Lenders prefer to see consistent income, which is often easier for salaried employees to document. If you’re self-employed, it’s about demonstrating reliable income and financial stability over a period of time. This has been a big issue lately because as more lenders update their policies, more self-employed borrowers have been seeking clarity.

From the self-employed perspective, understanding the mortgage landscape is about knowing what the lenders want to see, how they determine income and what you need to provide. The good news is that with the right guidance and preparation, self-employed buyers are able to confidently navigate the mortgage market and potentially borrow the money they need to buy the home of their dreams.

How Lenders Assess Income for the Self-Employed

Lenders treat self-employed income differently. They normally want to see at least two years’ financial history, so you may have to provide tax returns or SA302 forms, official documents from HMRC that detail your earnings. This will help them assess whether you have a steady enough income and it is reliable enough to cover the repayments on the mortgage.

Most lenders will use the latest two years to average your income. If your income is going down, they could take the most recent year’s number or use it in an average that is weighted more in favour of your more recent earnings.

This is where accountants help. The chartered accountants who would have prepared your accounts can also give letters of confirmation about your income and business health. This added reassurance can enable lenders to feel more at ease with your application.

Some lenders go beyond mere profit numbers and may look at other factors, projections, contracts or stability of client base if you’re a contractor or consultant. So, having a proven, well-handled business that comes with clear and consistent income records is very, very important, because it might help borrowers access the right borrowing options.

Required Documentation: What You’ll Need to Show

If you’re self-employed and want to apply for a mortgage, you’ll need to collect several documents to demonstrate your income and identity. The primary ones are SA302 forms or tax calculations from HMRC, which provide a breakdown of the income you’ve declared on your tax return.

You’ll also need your full business accounts, ideally certified by a chartered accountant. These accounts demonstrate your profit and loss, indicating to lenders your income and the health of your business. Business bank statements from the past 3 to 6 months aid in this confirmation process, validating your cash flow and ensuring that the income corresponds to the stated amount.

Proof of identity, in the form of a passport or driving licence, and proof of address, in the form of utility bills or bank statements, are also commonplace. Depending on your type of business or financial situation, some lenders may request more paperwork, so it’s good to be ready.

Well-organised, ready documents can speed up the mortgage process and demonstrate to lenders that you’re serious and responsible.

How Much Can You Borrow?

So, what percentage of your income does lenders let you borrow for a self-employed mortgage? Several key factors are at play here.

The majority of lenders operate on an income multiple system, where they lend a minimum of 4 to 4.5 times your average annual income. So, for example, if your yearly income averaged out at £40,000, you could anticipate a borrowing range of around £160,000-£180,000. The breakdown within your particular case varies according to specific lender policies.

Your credit rating is also a factor in determining how much you can borrow. Having a solid credit history shows lenders that you are less risky, which could benefit your borrowing power. A larger down payment also works, as it decreases the loan-to-value ratio and inspires greater confidence among lenders.

And don’t forget about your existing debts and monthly expenses. These eat away at your disposable income and will also be taken into account in affordability checks. For example, if you have a car loan or large credit card payments, the amount you can borrow may be reduced.

This is a highly simplified example, but consider Jane, a sole trader earning an average UK wage of around £50,000 per year, with a good credit score and a 15% deposit. She also carries a modest personal loan. The lender could apply a multiple of 4.5 to her income, but could then deduct the monthly loan payments from that sum, leaving her able to borrow approximately £200,000.

Contrast this with Tom, who runs a limited company and takes out £70,000 in salary and dividends. With no debts and a 20% deposit, he could be eligible to borrow as much as £315k.

It’s a sliding scale because no two situations are the same, so it’s always worth discussing with a mortgage adviser who regularly arranges self-employed mortgages to find out how much you could borrow.

Borrowing Differences by Business Type

The amount you can borrow also depends on the structure of your business. Here’s a quick breakdown:

• Sole traders: Lenders usually assess your net profit, which is your income after expenses. They will examine your tax returns, business accounts and other evidence to confirm this.

• Partnerships: Borrowing in this case is based on your net profit share. Partners are owners of the business, and lenders want to know how much of the profits are allocated to each partner, not just business-wide earnings.
• Directors of limited companies often receive income through a combination of salary and dividends. Most lenders will combine both to calculate total income, provided the dividends are averaged, regular and well-documented. In some cases, lenders may also consider salary plus a share of net profit, either before or after tax, depending on their criteria.
• Contractors: Paid in day rates, lenders may base income on your contract terms and historic earnings. Some lenders are more contractor mortgage-friendly and understand this payment method.

Each type of business has its own idiosyncrasies, so it’s essential to provide clear and accurate documentation that complements your structure to ensure a successful mortgage application.

Tips to Improve Your Borrowing Power

Looking to maximise your chances of borrowing more? Here are some practical tips.

For one thing, get those tax returns in on time, and be sure they’re accurate. Lenders can become uneasy due to delays or mistakes. The earlier you file your returns, the more hassle-free the process is.

Make sure that your business expenses are reasonable. Padding expenses inflates your net profit, which could curtail your potential borrowing. It’s a balance, pick your battles, but don’t pile on.

Keep your credit as clean as possible. Just pay bills on time, keep credit card balances low is possible and avoid applying for lots of credit right before your mortgage application. It’s a mark of trust that lenders use to determine whether you’re trustworthy.

Using the right mortgage broker who understands self-employed mortgages can be helpful as well. They know the quirks and can help track down lenders who fit your circumstances, at the same time potentially unlocking better rates and more generous borrowing limits.

Finally, you could save up for a larger down payment. That decreases risk to lenders, and often, better terms are the result.

Taken together, these steps might give you the best shot at a mortgage that works for you and your life.

Common Pitfalls and How to Avoid Them

There are a few common challenges that many self-employed borrowers trip over. Unpredictable income may make a lender nervous, so see if you can even levels out.

Disorganised record-keeping will make it more difficult to prove your income, so maintain clear, organised accounts. And wait to apply til you have at least two years’ worth of accounts or tax returns; most lenders want this history. Keeping up with such details may prevent delays and denials that otherwise may get in the way of your mortgage journey.

Conclusion: Planning Ahead is Key

For a self-employed borrower, gaining that mortgage requires preparation and clear documentation. Learning about how lenders see your income and the extent of your borrowing power is empowering. An effective strategy and the advice of a mortgage professional can help you maintain a great pace in this race to your new home.

Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it. 

There may be a fee for mortgage advice. The precise amount will depend upon your circumstances and will be agreed with you before proceeding, but we estimate it will be £395.