Welcome to the world of self-employed mortgages. If you are self-employed, then you’re part of a growing demographic in the UK.
As a self-employed individual, securing a mortgage can sometimes be a challenging task. Unlike salaried employees, providing proof of income can be difficult due to fluctuations in business income.
In this article, we will explore what self-employed mortgages are and how they work, with a specific focus on self-employed mortgages where you have just one years of accounts.
With the help of specialist lenders and mortgage brokers, it is possible for self-employed borrowers to secure the mortgage they need.
Understanding Self-Employed Mortgages
So, what exactly is a self-employed mortgage?
In essence, it’s no different from a regular mortgage. It’s a loan taken out to buy a property, with the key difference being the criteria lenders use to assess your application. You will still have access to the same range of interest rates and options as someone who is fully employed.
For self-employed individuals, lenders will look at your business profits rather than a salary.
Eligibility Criteria
When it comes to the eligibility criteria for self-employed mortgages, there are a few key factors to consider.
First, your credit score plays a significant role. A good credit score can make you more attractive to lenders, showing them that you’re reliable when it comes to repaying debts.
Secondly, having a good sized deposit will improve your chances of approval. The larger your deposit, the less risk the lender takes on, which can make them more likely to approve your application.
Lastly, having a stable income and a profitable business is crucial. Lenders need to see that your business is profitable and that you have a steady income stream. They prefer to look at your profits over the past few years to assess this.
Who can apply for one
This type of mortgage is designed specifically for self-employed individuals like directors, sole traders, contractors, freelancers and business owners who may not have a steady income or a fixed employed salary.
Lenders will assess your mortgage application based on your latest self-assessment figures, and a 12 month projection from your accountant.
Directors who own 0-20% of their company are usually assessed as an employee. Those with higher shareholding will be treated as self employed.
You may find this useful: Guide to self employed mortgages.
Mortgages with only one year’s accounts
But what if you’ve only been self-employed for a year?
Can you still get a mortgage?
The answer is yes, but it can be more challenging. Lenders prefer to see at least two to three years’ worth of accounts to assess your income. However, with the help of a mortgage broker and by providing as much supporting evidence as possible, you can increase your chances of approval.
For instance, if you can show that your income has been steadily increasing over the year, or if you have a strong pipeline of future work, this can help to reassure lenders.
Similarly, if you have a large deposit or a high credit score, this will improve your chances.
Types of Self-Employed Mortgages
Let’s explore the different types of self-employed mortgages and how an independent mortgage broker can help find the right one for you.
Self-Employed Mortgages
These mortgages are designed specifically for those who are self-employed or run their own business. Proof of income would be via business accounts and SA302 statements, and bank statements.
Contractor Mortgages
If you’re a contractor, you may be eligible for a contractor mortgage. These mortgages are available to those who work on a project basis, often through a limited company. Lenders typically require a minimum of 12 months’ trading history and proof of future income, such as a contract with a client.
Freelancer Mortgages
Freelancer mortgages are designed for those who work on a project basis for multiple clients. These mortgages are similar to self-employed mortgages in that you’ll need to provide proof of income for the past year or two. Lenders will also require evidence of future work and income projections.
Company Director Mortgages
Directors who own 0-20% of their company are usually assessed as an employee. Those with higher shareholding will be treated as self employed.
The Role of a Mortgage Broker
This is where mortgage brokers come in.
They can be invaluable in helping you navigate your mortgage options. A mortgage broker has access to a wide range of lenders, some of whom may be more willing to lend to self-employed individuals with one year’s accounts.
Moreover, a mortgage broker can provide bespoke advice tailored to your circumstances. They can guide you on how to present your application in the best light, and they can help you understand the different mortgage options available to you.
Preparing for the Mortgage Application
The mortgage application process can seem overwhelming, and it’s generally more involved if you’re self-employed.
However, with a bit of preparation, you can increase your chances of success. Here are some tips to increase your mortgage affordability and help you prepare:
Get your documentation in order
Lenders will want to see proof of your income and your business profits. This will typically include your SA302 tax returns, business accounts, and bank statements. Make sure you have all these documents ready to speed up the application process.
Consider future income projections
If you’ve only been self-employed for a year, future income projections can be particularly useful. If you can show that your income is likely to increase in the future, this can help to reassure lenders.
Check your credit score
Your credit score is a key factor that lenders consider when assessing your application. Make sure you check your credit report before applying and take steps to correct any errors if necessary.
Personal bank statements
As well as business bank statements, the lender will want copies for your personal account. This is so that they can assess the mortgage affordability, which looks at your income and your expenditure. You can use our Mortgage Affordability Calculator to see how this works for you.
Save for a larger deposit
The larger your deposit, the less risk the lender takes on. Easier said than done, but if you can save for a larger deposit, this can increase your chances of approval.
Tax Returns and SA302 Forms Explained
Here’s what you need to know when it comes to tax returns and SA302 forms for self-employed mortgages.
Tax Returns:
As a self-employed individual, you are required to file a self assessment tax return to HMRC every year. This tax return will show your total income and expenses for the year, as well as any tax you owe. When applying for a mortgage, lenders will normally prefer two or three years of tax returns. This is to verify your income and see your track record of financial stability.
SA302 Forms:
The SA302 form is a document issued by HMRC that shows your earnings and the amount of tax you have paid for a particular tax year. It is essentially a summary of your tax returns. Lenders may ask for your SA302 forms as proof of income, particularly if you need to provide just one year of accounts. You can obtain your SA302 forms by logging into your online HMRC account or by calling HMRC and requesting them to post it to you.
The next steps
While securing a mortgage as a self-employed individual can be hard work, it’s certainly not impossible.
With careful preparation and the right support, you can successfully get on the property ladder.
To get started, call us on 020 8301 7930 to speak with a self-employed mortgage specialist.