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Mortgages for Self-Employed | First-Time Buyers | Mortgage Help

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Video Transcript

Introduction

If you’re self-employed and looking to buy your first home, getting a mortgage can be a little different compared to someone in traditional employment. In this discussion, mortgage broker and accountant Iftake shares his insights on how self-employed people can improve their chances of securing a mortgage.

Who Is Considered Self-Employed?

From a bank’s perspective, “self-employed” can include several different groups:

  • Sole traders (e.g., plumbers, electricians, freelancers)
  • Company directors
  • Individuals who own a significant share of a company
  • Contractors working on day-rate contracts

Although these categories operate differently, lenders often assess them under the same broad self-employed criteria.

Why Is It Harder for Self-Employed People to Get a Mortgage?

For Employed Applicants

Lenders can easily verify income through:

  • Payslips
  • Employment contracts
  • HMRC records

Because income is generally stable and predictable, assessing affordability is relatively straightforward.

For Self-Employed Applicants

Lenders face additional challenges because:

  • Income can fluctuate throughout the year.
  • Businesses may experience seasonal highs and lows.
  • There are no regular payslips in many cases.
  • Income is often verified through annual tax returns rather than monthly earnings.

As a result, lenders may be more cautious when assessing self-employed borrowers.

How Do Lenders Assess Self-Employed Income?

Sole Traders

Lenders typically review:

  • Self-assessment tax returns
  • Submitted accounts
  • HMRC records

Company Directors

Lenders often consider:

  • Salary
  • Dividend income

These figures are usually taken from tax returns and company accounts.

The Challenge

Since tax returns are only submitted annually, lenders may not have a current picture of your earnings. For example, if your last accounts were prepared 10 months ago, a lot could have changed since then.

What If You’ve Recently Become Self-Employed?

Traditionally, most lenders require:

  • At least two years of accounts

However, the market has evolved, and some lenders now offer:

  • Mortgages based on one year’s accounts
  • Alternative methods of assessing income

Company Profit Assessments

Some business owners keep profits inside their company for tax efficiency rather than taking large salaries or dividends.

Certain lenders may look at:

  • Company profits
  • Profit and loss accounts

rather than relying solely on salary and dividends.

Contractor Mortgages

For contractors, some lenders can assess affordability using:

  • Daily contract rates
  • Current contract income

This may reduce the reliance on long-term accounts or tax returns.

Alternative Options for Self-Employed Borrowers

Bespoke Underwriting

Some lenders take a more flexible approach and assess applications individually.

For example:

  • A poor trading year caused by exceptional circumstances (such as the COVID-19 pandemic) may be disregarded.
  • Lenders may focus on more recent business performance.

This flexibility can be especially helpful for businesses that experienced temporary setbacks.

The Importance of Planning Ahead

One of the most important messages from the discussion is the value of planning.

Example

A company may generate:

  • £100,000 profit

But the director only takes:

  • £10,000 salary
  • £10,000 dividends

Many lenders will view their income as only £20,000, even though the business is highly profitable.

Why This Matters

If you’re planning to apply for a mortgage:

  • Speak with your accountant.
  • Speak with a mortgage adviser.
  • Understand how lenders will assess your income.
  • Consider whether your salary and dividends support the mortgage amount you need.

Good planning can help avoid disappointment later.

Additional Tips for Self-Employed Applicants

1. Seek Professional Advice Early

An accountant or mortgage adviser can help you:

  • Structure your income appropriately.
  • Understand lender requirements.
  • Prepare for a future mortgage application.

2. Balance Tax Efficiency with Borrowing Power

Reducing tax liability is important, but taking very little income can limit your mortgage options.

You may need to:

  • Increase salary or dividends
  • Pay a little more tax
  • Improve your borrowing capacity

3. Don’t Only Approach Your Own Bank

While your bank may offer a solution, specialist lenders often have:

  • More flexible underwriting
  • Better options for self-employed borrowers
  • Greater willingness to consider exceptional circumstances

4. Consider Specialist Lenders

Many specialist lenders are not found on the high street and may offer products specifically designed for:

  • Self-employed applicants
  • Contractors
  • Company directors
  • Borrowers with unusual income patterns

Key Takeaways

  • Self-employed applicants can still obtain mortgages successfully.
  • Lenders assess self-employed income differently from employed income.
  • Most lenders use tax returns, salary, and dividends to determine affordability.
  • Some lenders consider company profits or contractor day rates.
  • One year of accounts may be enough with certain lenders.
  • Planning ahead with an accountant or mortgage adviser can significantly improve your options.
  • Specialist lenders may offer solutions where mainstream lenders cannot.

Important Reminder

As with all mortgage advice, every individual’s circumstances are different. What works for one borrower may not be suitable for another.

Your home may be repossessed if you do not keep up repayments on your mortgage.