Self-Employed Mortgage Guide
How Mortgages Work When You Work for Yourself
Being self-employed doesn't mean you can't get a mortgage.
The difference is usually in how your income needs to be evidenced and how different mortgage lenders assess it.
If you're employed, proving income can sometimes be relatively straightforward: salary, payslips and bank statements.
If you're self-employed, your income may come through business profits, drawings, salary, dividends, contracts or a combination of different sources. Two applicants earning broadly the same amount could therefore receive very different affordability results depending on how their businesses and income are structured.
This is also an area where lender criteria can vary considerably.
Whether you're a sole trader, limited-company director, contractor, partner or CIS worker, understanding how lenders may look at your income can help you prepare for a mortgage application.
Can I Get a Mortgage If I'm Self-Employed?
Yes, subject to affordability, lender criteria and your wider circumstances.
There isn't a separate category of property called a "self-employed mortgage".
In many cases, you'll be applying for the same residential mortgage products available to other eligible borrowers.
The difference is primarily how the lender establishes and verifies your income.
A lender will want sufficient evidence to demonstrate that your income meets its requirements and supports the proposed mortgage.
Who Is Considered Self-Employed?
The definition can vary between lenders.
People who may be treated as self-employed for mortgage purposes include:
Sole traders
Limited-company directors
Partners in a business
Contractors
Freelancers
Some CIS workers
Company directors can be particularly important because lenders have different rules regarding the percentage of company ownership at which they treat someone as self-employed.
Your employment classification should therefore be checked against the criteria of the lender being considered.
How Much Can I Borrow If I'm Self-Employed?
There isn't one universal borrowing multiple for self-employed applicants.
Lenders consider affordability using their own calculations.
The amount potentially available can depend on factors including:
Your assessable income
How your income is structured
Business trading history
Recent financial performance
Loans and credit commitments
Dependants
Household expenditure
Deposit
Mortgage term
Credit history
Property
The lender's affordability model
The important question isn't simply:
"How much profit does my business make?"
It is also:
"How will the lender I'm considering assess that income?"
How Many Years of Accounts Do I Need?
Many lenders prefer an established trading history, and two years of accounts or tax information is commonly useful when preparing for a mortgage application.
However, this isn't a universal rule.
Some lenders may consider applicants with a shorter trading history in appropriate circumstances, while others may require a longer history or additional evidence.
The lender may also consider whether your income is stable, increasing or decreasing.
This means you shouldn't automatically assume you must wait for a particular anniversary before discussing your mortgage options.
What Documents Will I Need?
Requirements vary depending on your business structure and the lender.
As a starting point, self-employed applicants may be asked for documents such as:
Accounts
Tax Calculations
Tax Year Overviews
Recent personal bank statements
Business bank statements where required
Identification
Proof of address
Evidence of deposit
Details of existing credit commitments
Additional documents may be requested depending on the application.
Our Documents Needed for a Mortgage guide provides a broader mortgage-document checklist.
What Is a Tax Calculation?
A Tax Calculation provides information relating to your income and tax position for a particular tax year.
You may still hear this referred to as an SA302, although the documents available and terminology can depend on how your tax return is submitted and produced.
Mortgage lenders may request Tax Calculations as evidence when assessing self-employed income.
What Is a Tax Year Overview?
A Tax Year Overview is a document from HM Revenue & Customs showing information relating to your tax position for a particular year.
A lender may request Tax Year Overviews alongside Tax Calculations.
Where both are requested, the figures can help the lender verify the information being used for the mortgage assessment.
How Do Lenders Assess Sole Traders?
A sole trader runs a business personally rather than through a separate limited company.
Mortgage lenders may assess income using the taxable profit generated by the business, subject to their individual criteria.
They may look at more than one year's figures and consider the direction in which income is moving.
For example, a business showing consistent or increasing profits can be assessed differently from one showing a substantial recent reduction.
Exactly how income is calculated varies between lenders.
What If My Latest Year's Profit Is Higher?
Increasing profits can be positive, but you shouldn't automatically assume a lender will use only the latest and highest figure.
Depending on the lender and circumstances, it may consider:
An average over a specified period
The latest year's figure
Previous years
The trend in the business
Reasons for significant changes
Different lenders can therefore produce different affordability results from the same set of accounts.
What If My Profit Has Fallen?
A reduction in profit doesn't automatically mean a mortgage is impossible.
However, lenders may want to understand the reason for the reduction.
They may consider whether the fall appears temporary or reflects a more significant change in the business.
Depending on the lender, declining income could result in a different figure being used for affordability or additional underwriting questions.
Don't try to hide a reduction.
Understanding it before submitting the application is much more useful.
How Are Limited-Company Directors Assessed?
This is one of the areas where lender criteria can differ significantly.
A limited-company director may receive income through:
Salary
Dividends
Both salary and dividends
Other income permitted within the company's structure
Some lenders may primarily consider salary and dividends.
Other lenders may, in appropriate circumstances, have criteria that allow them to consider different measures of company performance, potentially including a share of retained business profits.
This can create substantial differences in affordability between lenders.
What Are Retained Profits?
A profitable limited company doesn't necessarily distribute all of its earnings to its shareholders.
Some profit may remain within the business.
This is commonly referred to as retained profit.
A company director may deliberately leave money within the business for reasons such as:
Working capital
Future investment
Tax planning
Building cash reserves
Purchasing equipment
Funding future growth
If a mortgage lender only assesses the director's salary and dividends, it may not reflect the wider profitability of the business.
Some lenders have criteria that may allow a different assessment of company income.
This is an area where specialist lender research can be particularly useful.
Why Can Salary and Dividends Be Misleading?
Imagine a business owner who deliberately takes a relatively modest salary and dividend income while leaving substantial profits within a successful company.
Their personal taxable income might appear considerably lower than the underlying profitability of the business.
A lender assessing only salary and dividends may therefore calculate a lower affordability figure than a lender whose criteria allow a broader assessment of the company's financial position.
This doesn't mean retained profits can always be used.
The lender's criteria, company ownership, financial performance and circumstances all matter.
Does My Shareholding Matter?
It can.
Mortgage lenders have different definitions of when a company director should be treated as self-employed.
Your percentage ownership of the company can therefore affect how the lender assesses your income.
It can also be relevant where a lender is considering company profits rather than simply salary and dividends.
Make sure your adviser understands the ownership structure of the business.
What If I Own the Company With Someone Else?
Tell your mortgage adviser the percentage of the company you own and who owns the remaining shares.
If a lender is considering company profits, your share of those profits may be relevant rather than simply the total profit generated by the company.
The lender may also have requirements concerning the other shareholders or directors.
What Is Director's Remuneration?
Director's remuneration generally refers to payments made to a director for their role in the company.
The terminology appearing in company accounts can differ from the figures appearing on personal tax documents.
This is another reason the accounts and personal tax information should be reviewed together rather than relying on one number without understanding what it represents.
Do Lenders Look at Company Accounts?
For limited-company directors, lenders may request company accounts depending on their criteria and how income is being assessed.
The accounts can provide information about matters such as:
Turnover
Profit
Director remuneration
Dividends
Assets
Liabilities
Company financial position
Some lenders may also request information from your accountant or additional financial evidence.
Does My Accountant Need to Be Qualified?
Some mortgage lenders have requirements concerning accountants where they rely on accounts or accountant references.
Requirements vary.
If your accounts are prepared by an accountant, provide their details to your mortgage adviser so the lender's requirements can be checked before an application is submitted.
What If I Have Only One Year's Accounts?
Mortgage options can be more limited with a short trading history, but this doesn't automatically mean there are no options.
Some lenders may consider an applicant with one year's trading history where their criteria are satisfied.
Factors could include:
Previous employment history
Experience in the same industry
Current business performance
Nature of the business
Income
Deposit
Credit history
Overall circumstances
Don't assume that one year of self-employment automatically means you need to wait another year.
It is better to investigate the position first.
What If I've Recently Changed From Sole Trader to Limited Company?
This is a common situation.
You may have traded for several years as a sole trader and recently incorporated the same business.
A lender may not necessarily view this in exactly the same way as someone who has only just started trading.
Some lenders may consider the continuity of the underlying business, subject to their criteria.
Useful information can include:
Previous sole-trader accounts
Current limited-company accounts
Date of incorporation
Nature of the business
Whether the business activity remained the same
Tell your mortgage adviser about the complete trading history rather than simply saying the company is new.
What If I've Recently Become Self-Employed?
The more recent the change, the more important your previous employment and experience can become.
For example, someone who has spent many years working in an industry before establishing their own business in the same field may present a different situation from someone starting an entirely new business with no previous experience.
Whether a lender accepts the application will depend on its criteria.
How Are Contractors Assessed?
Contractors can be assessed in different ways depending on the lender and the structure of their work.
Some lenders may consider conventional self-employed evidence.
Others may have specific contractor criteria that can potentially use information such as:
Contract value
Day rate
Contract duration
Contract history
Time remaining on the current contract
Gaps between contracts
Experience within the industry
The appropriate assessment depends on the lender and circumstances.
What Is Day-Rate Contractor Income?
Some contractors are paid according to a daily rate.
Certain mortgage lenders have criteria allowing them to calculate an annualised income using the day rate, subject to their particular formula and requirements.
Not every lender uses the same calculation.
For example, lenders can differ in the number of working days or weeks they assume when annualising a day rate.
You shouldn't therefore calculate a figure yourself and assume every lender will accept it.
What About CIS Workers?
CIS stands for Construction Industry Scheme.
Some mortgage lenders have specific criteria for applicants working under CIS arrangements.
Depending on the lender and circumstances, income may potentially be assessed differently from that of a conventional sole trader.
Evidence could include:
CIS statements or payslips
Contracts
Bank statements
Tax information
Trading history
The exact requirements depend on the lender.
Can Freelancers Get a Mortgage?
Yes, subject to lender criteria and affordability.
The main issue is establishing an acceptable and sustainable income figure.
A freelancer may have income from several clients rather than one employer.
Depending on how the business operates, the applicant could be assessed as a sole trader, company director, contractor or under another relevant category.
Understanding the structure first helps determine which lenders may be appropriate.
What If My Income Changes Every Year?
Variable income is common among self-employed applicants.
Mortgage lenders understand that business income doesn't necessarily remain identical every year.
However, they will want to establish a reasonable figure for affordability.
They may consider:
Historical income
Latest income
Average income
Direction of travel
Significant fluctuations
Reasons for changes
Large unexplained variations can lead to additional underwriting questions.
What If the Current Year Is Better Than My Last Accounts?
Your latest completed accounts don't always tell the whole story.
If your business has grown substantially since the most recent year end, tell your mortgage adviser.
Depending on the lender and circumstances, additional evidence may potentially help demonstrate current performance.
This could include management accounts, business bank statements or information from your accountant where acceptable to the lender.
However, lenders differ in how much weight they give to figures that haven't yet formed part of completed accounts or tax returns.
What Are Management Accounts?
Management accounts are financial reports produced during the company's current accounting period rather than the final statutory accounts prepared after year end.
They can provide more recent information about business performance.
Some lenders may consider management accounts in particular circumstances, but they don't automatically replace the formal evidence required by the lender.
Will Business Bank Statements Be Required?
Potentially.
Some lenders may request business bank statements as part of underwriting, particularly where additional information about current trading is required.
Bank statements can help demonstrate the financial activity of the business.
The lender may also question unusual transactions or significant changes in income.
What If I Leave Money in My Business?
Leaving money within a business isn't automatically a problem.
Many business owners deliberately retain cash for legitimate commercial reasons.
However, if most of the company's profits remain within the business and your personal salary and dividends are relatively modest, lender selection can become particularly important.
Some lenders may assess your position differently from others.
Can I Take a Bigger Dividend Before Applying?
Making significant changes to the way you extract money from your company purely to obtain a mortgage should be discussed carefully with your accountant and mortgage adviser.
There can be tax and business consequences.
It may also be unnecessary if an appropriate lender can assess your existing income structure.
Your mortgage strategy shouldn't undermine sensible management of your business.
Do I Need to Change My Accounts to Get a Mortgage?
Don't make accounting or tax decisions solely because you think they will improve mortgage affordability without obtaining appropriate professional advice.
Mortgage lenders have different ways of assessing self-employed income.
Sometimes the better approach is finding a lender whose criteria appropriately reflect the way your business already operates.
Tax and accounting decisions should be discussed with your accountant or tax adviser.
Does Being Self-Employed Mean I Pay a Higher Mortgage Rate?
Not automatically.
Being self-employed doesn't, by itself, mean you must have a higher mortgage interest rate.
If you meet the criteria for a mainstream mortgage product, you may potentially access products available to other eligible borrowers.
However, if your circumstances require a more specialist lender, the available rates and fees may differ.
The mortgage product depends on the overall application rather than simply the label "self-employed".
Does My Deposit Matter?
Yes.
Your deposit determines your loan-to-value alongside the property price.
A larger deposit can reduce the LTV and may provide access to different mortgage products, subject to lender criteria.
However, don't assume you should put every available pound into the property.
You may also need funds for:
Legal costs
Surveys
Moving expenses
Property repairs
Mortgage fees
Emergency savings
For someone running a business, maintaining appropriate personal and business cash reserves can be particularly important.
What About My Business Loans?
Business borrowing can potentially be relevant.
The lender may want to understand the liability, repayment structure and whether it affects your personal finances or business profitability.
Tell your mortgage adviser about:
Business loans
Personal guarantees
Business credit cards
Director's loans
Vehicle finance
Other significant business commitments
Don't assume a commitment is irrelevant simply because it sits within the business.
What Is a Director's Loan?
A director's loan generally refers to money moving between a company and its director outside normal salary, dividend or expense arrangements.
A director's loan account can be in credit or overdrawn depending on the circumstances.
If the company accounts show a significant director's loan position, a mortgage lender may ask questions about it.
Your accountant can explain the accounting and tax position, while your mortgage adviser can consider how a particular lender may treat it.
Does My Credit History Still Matter?
Yes.
Being self-employed changes how income may be assessed, but the lender will still consider your wider application.
Your credit history can include:
Credit cards
Loans
Car finance
Payment history
Defaults
County Court Judgments
Other credit commitments
If you've experienced credit difficulties, tell your mortgage adviser before an Agreement in Principle or application is submitted.
Should I Reduce My Declared Income to Pay Less Tax?
Tax planning should be discussed with an appropriately qualified accountant or tax adviser.
From a mortgage perspective, reducing the income or profit shown in your financial records can affect the income available for a lender to assess.
There can therefore be a relationship between legitimate tax planning and future mortgage affordability.
This is something worth considering with your accountant well before you need a mortgage rather than immediately before an application.
Can I Get an Agreement in Principle If I'm Self-Employed?
Potentially, yes.
An Agreement in Principle can provide an initial indication of potential borrowing.
However, the income entered needs to be calculated appropriately for the lender being considered.
Using the wrong income figure could create a misleading result.
This is particularly relevant for company directors where different lenders may assess salary, dividends or company profits differently.
Read our Agreement in Principle Guide for more information about how AIPs work.
Preparing for a Self-Employed Mortgage
Good preparation can make the process much easier.
Before speaking to your mortgage adviser, try to have available:
☐ Latest accounts
☐ Previous accounts where available
☐ Tax Calculations / SA302 information
☐ Tax Year Overviews
☐ Recent personal bank statements
☐ Business bank statements if available
☐ Details of your accountant
☐ Company number if applicable
☐ Your percentage shareholding
☐ Salary and dividend information
☐ Details of existing loans and credit commitments
☐ Evidence of your deposit
☐ Information about any recent changes to the business
Contractors may also want to prepare:
☐ Current contract
☐ Day rate
☐ Contract start and end dates
☐ Previous contracts
☐ Details of any gaps between contracts
CIS applicants may also need relevant CIS income evidence.
The exact documents required will depend on your circumstances and lender.
Don't Wait Until You've Found a Property
If you're self-employed, speaking to a mortgage adviser before making an offer can be particularly useful.
There may be several different ways lenders could assess your income.
Understanding that position early can help you establish a more realistic budget before you start seriously viewing properties.
It also provides time to identify missing documents or issues that could otherwise delay an application.
Why Lender Selection Matters for Self-Employed Applicants
Two lenders can look at the same business and arrive at different assessable income figures.
One may focus primarily on salary and dividends.
Another may have criteria that allow a broader consideration of company profitability.
One lender may require a particular trading history.
Another may consider a shorter period.
One may have specialist contractor criteria.
Another may treat the same applicant as conventionally self-employed.
This is why self-employed mortgage advice often involves understanding the applicant's business before researching mortgage products.
The lowest advertised rate isn't useful if the lender's criteria don't properly fit your circumstances.
Self-Employed Doesn't Mean Mortgage Difficulties
Running your own business shouldn't automatically be viewed as a mortgage problem.
The important thing is presenting your income correctly and finding a lender whose criteria fit the way you earn it.
Cambs Ely Mortgages can help self-employed applicants including sole traders, limited-company directors, contractors, freelancers and CIS workers understand how different mortgage lenders may assess their circumstances.
We can review your income structure, accounts and mortgage requirements before considering potential lender options.
We help clients in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.
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Important Information
This guide provides general information and shouldn't be treated as personalised mortgage, financial, accounting, legal or tax advice.
Mortgage affordability and the treatment of self-employed income vary between lenders and depend on individual circumstances. Mortgage products and lender criteria can change.
Accounting and tax decisions should be discussed with an appropriately qualified accountant or tax adviser.
Your home may be repossessed if you do not keep up repayments on your mortgage.