Can I get a mortgage if I’m self-employed?

Can I get a mortgage if I'm self-employed?

It’s the big question – and one that we’re often asked: “Can I get a mortgage if I’m self-employed?”

So, “Can I get a mortgage if I’m self-employed?” Well, the short answer is YES – you can! However, it’s crucial to plan as far in advance as possible. You need to arm yourself with as much detail as you can about what mortgage lenders will be looking for, so you can be prepared – and that’s where we can help.

So, whether you’re a sole trader, a partner in a business or a director of a limited company, and you want to buy your first property, sell up and buy a new property or remortgage, keep reading…

How to use this guide

In this guide we’ll look at what you need to do to get a mortgage if you’re self-employed. We’ll consider:

  • Self-employment categories
  • Getting a mortgage as a sole trader
  • How to get a mortgage as a partner or limited partner
  • Getting a mortgage as a director of a limited company

I’ll discuss each category in detail, considering what mortgage lenders prefer to see for each, as a general rule. I’ll also be answering the questions most frequently asked by clients asking: “Can I get a mortgage if I’m self-employed?”.

If you know which self-employed category you are in, you can head straight to that section. If you’re unsure, or forward planning for a move to self-employment, then just keep reading!

Self-employment categories

There are three main types of self-employed categories:

Sole Trader

If you’re self-employed running and operating your own small business, then you’re a sole trader. This is the simplest way of setting up a business, and most business matters are dealt with by the individual. There’s no legal distinction between the individual and the business.

Partner or Limited Partner

You are a partner in a business if you have entered a partnership with one or more other people, and each own a share of the business.

If you have unlimited liability for debts incurred by the business, then you’re a general partner. A limited partner has limited liability for the business’ debts; their liability cannot exceed the amount they have invested in the company.

Limited (LTD) Company Director

As a limited company director, you will be employed by the company – so you might well wonder, why are we looking at limited company directors? Well, if you own more than 20% – 25% of the shares then a mortgage lender is likely to class you as self-employed, rather than as employed.

Can I get a mortgage if I’m self-employed as a Sole Trader Business?

When it comes to getting a mortgage as a sole trader, lenders will look at your net profit figures. Net profit is the figure that is left after paying all your bills, so this is the figure on which you will pay tax, which will show on your HMRC Tax Calculation. As a rule of thumb, a lender will allow you to borrow up to 4.5 times your income

Example

Let’s say John Smith is self-employed, trading as John Smith Joinery Services. In addition, John’s annual income will typically be calculated from April to April, with the tax year.

John has invoiced £80,000 worth of work over the financial year. From that £80,000, John has spent £40,000 on tools, materials, ad-hoc labour and safety gear. John’s net profit is therefore £40,000 in that year. John’s accountant submits all these figures to HMRC and there we have it, £40,000 income.

So, as far as a mortgage lender is concerned, that income can be used for a mortgage application. Consequently, with a lender using 4.5 times John’s income to calculate his borrowing power, he can borrow £180,000.

Where does it go wrong?

We can’t have it both ways. That is, you can’t pay as little tax as possible on your business profits and still expect to borrow high amounts on a mortgage.

You should plan in advance with your accountant if you are looking to take out any form of mortgage in the future.

Can I get a mortgage with only one year’s books or accounts?

In short, the answer is yes, but your choices will be more limited than if you have two or three years’ worth of books and accounts – but it is possible. It’s best to speak to a good mortgage adviser if you’re self-employed and this is your current situation.

What documents will I need for a mortgage to prove my income as a self-employed sole trader?

Mortgage lenders will ask for what is known as a Tax Calculation (this used to be called a SA302) and its corresponding Tax Year Overview. The mortgage lender will need both documents for each year, covering the history for up to three years. If you have been self-employed for less time, then the lender will require to see these documents for all years that are available.

How do I get my Tax Calculations and Tax Year Overviews?

Your accountant can normally provide these to you from their own software. Alternatively, you can call HMRC and ask for them to be posted to your home address. You can also log in to the HMRC portal online and download them for yourself. (You are required to register for this service via HMRC).

Useful link: HMRC – Self Assessment: General Enquiries

How will lenders treat my income if it varies or has decreased?

Don’t worry, all is not lost! Lenders will want to know that you can sustain your mortgage repayments and therefore assess whether they think you will be able to afford your mortgage into the future.

If your income has varied or has decreased, then it will depend by how much and for what reason. Increasing is always the best trend. It’s therefore important to discuss this with a mortgage adviser who will be able to advise which lenders will take a view on your income as it stands, and some lenders will happily look at the reasons why the income has changed. As long as there is a plausible and legitimate reason, there is still a good chance of being able to get a mortgage as a self-employed sole trader.

Can I get a mortgage if I’m self-employed as a Partner or Limited Partner?

Although the makeup of the business is different to that of a sole trader, lenders will treat your share of the partnership or limited partnership income the same as they would as that of a sole trader. Ultimately, they will be looking at your share of the profit.

Example

Let’s say there are two of you in the partnership and the net profit for the business is £100,000. This number is simply divided by two, allowing us to arrive at your personal income for the year. Therefore, in this example, your income for mortgage purposes is £50,000.

All the other same rules apply between a sole trader or partnership.

Can I get a mortgage with only one year’s books or accounts?

In short, the answer is yes, but your choices will be more limited than if you have two or three years’ worth of books and accounts – but it is possible. It’s best to speak to a good mortgage adviser if this is your current situation.

What documents will I need for a mortgage to prove my income as a self-employed partner of a business?

Mortgage lenders will ask for what is known as a Tax Calculation (this used to be called a SA302) and its corresponding Tax Year Overview. The mortgage lender will need both documents for each year, covering the history of up to three years. If you have been a partner for less than three years, then the lender will require to see the documents for all years that are available.

It’s also handy to have your accounts that have prepared by your accountant for reference.

How do I get my Tax Calculations and Tax Year Overviews?

Your accountant can normally provide these to you from their own software. Alternatively, you can call HMRC and ask for them to be posted to your home address. You can also log in to the HMRC portal online and download them for yourself. (You are required to register for this service via HMRC).

Useful link: HMRC – Self Assessment: General Enquiries

How will lenders treat my income if it varies or has decreased?

Don’t worry – all is not lost! Lenders will want to know that you can sustain your mortgage repayments and therefore assess whether they think you will be able to afford your mortgage into the future.

If your income has varied or has decreased, then it will depend by how much and for what reason. Increasing is always the best trend. It’s therefore important to discuss this with a mortgage adviser who will be able to advise which lenders will take a view on your income as it stands, and some lenders will happily look at the reasons why the income has changed. As long as there is a plausible and legitimate reason, there is still a good chance of being able to get a mortgage as a self-employed partner.

Getting a mortgage as a Limited Company Director

As a limited company director your income is treated differently than that of a sole trader business or partnership as you are employed by the limited company.

However, as a general rule, if you own more than 25% of the shares (sometimes 20%) in the limited company, lenders won’t treat you as an employed person but as a self-employed person. They will look at some, or all, of the following as your income for mortgage purposes:

  • Salary
  • Dividends
  • Your share of profit (and retained profit)

How will mortgage lenders treat my salary as a limited company director?

I think it’s safe to say that all lenders will accept your salary element as income when deciding how much they are going to lend to you. They will also be looking out for your other elements of income from the company, as I’ll discuss below.

How will mortgage lenders treat my dividends as a limited company director?

Dividend income is taken from the profit of a business after it has paid all its costs and allowed for corporation tax.

Example

Profit after costs = £100,000

After deductions for corporation tax = £81,000

Allowable dividend = £81,000

(Note: The above example assumes you are the only shareholder taking the dividend. If there are additional shareholders then you will have agreed how much of the profit less tax (£81,000) is to be paid to each shareholder. The mortgage lender will simply consider only your dividend).

A large majority of mortgage lenders will accept your dividends as part of your income makeup and typically, combined with your salary, lenders will use these to assess how much they are willing to lend to you.

Will mortgage lenders use business profit as income?

This is a very good question and I’m glad you asked. In short, the answer is yes, but only a smaller number of lenders (around 30 at the time of writing this article) will consider business profit as income.

The best way to explain how this could work is by giving an example:

Example

Let’s assume that you own 100% of the shares in your limited company and your company has made a profit (after costs and corporation tax) of £80,000 for that year. You have then drawn a dividend of £30,000 for that year and retained £50,000 in the business (as this was good tax advice from your accountant and good business planning to retain cash in the business).

Most mortgage lenders would use your salary and your dividend. So, if your salary was £10,000 and your dividend was £30,000, then your total income is £40,000.

But I hear you ask: “What about all that income that is technically mine, still in the business?”

You are in luck, as some lenders would use your salary, along with your net profit.

Example

Continuing the scenario above, if your salary is £10,000 and the business made a net profit of £80,000, your income would be £90,000. This would therefore give you a much higher borrowing capability.

Not only that, there are also some lenders that will use your profit BEFORE you have taken off the corporation tax bill. Your mind is blown, I know!

Example

So, let’s look at a company with £100,000 profit and using an example corporation tax figure of 19%: your net profit after tax will be £81,000 – but adding that 19% back into the calculations would again increase your borrowing power significantly.

Let’s work through the example:

John Smith Consultancy LTD financial year end figures look like this:

Profit before tax: £100,000

Profit after tax: £81,000

Dividend taken: £30,000

Salary: £10,000

So, as you can see, the differences can be vast.

Can I not just say I’m an employee?

No. Firstly, this would be classed as mortgage fraud if you were knowingly misleading a mortgage provider; and secondly, mortgage lenders carry out many background checks that can flag up information they should have known in the first place. So, even if you managed to get past the gate keeper (your mortgage adviser), information would be picked up by the lender.

Falsifying information will end you up on lists that lenders share with each other to prevent fraud and could end you up with a prison sentence as a result.

Can I get a mortgage with only one year’s books or accounts as a limited company director?

In short, the answer is yes, but your choices are more limited than if you have two or three years’ worth of books and accounts – but it is possible. It’s best to speak to a good mortgage adviser if this is your current situation.

What documents will I need for a mortgage as a limited company director to prove my income?

This will vary from lender to lender but here I’ll highlight the most common ways to prove your income as a limited company director.

Some mortgage lenders will ask for what is known as a Tax Calculation (this used to be called a SA302) and its corresponding Tax Year Overview. If so, the mortgage lender will need both documents for each year covering the history of up to three years. If you have been a director and shareholder (and therefore classed as self-employed) for less time, then the lender will require to see all years that are available. They will be looking at the ‘pay from employments’ and the ‘dividends from UK companies’ sections.

Other lenders will wish to see the accounts that are produced by your accountant, as they wish to take a closer look at the numbers overall, rather than just your personal drawings.

Any lenders who don’t fall into the categories above will simply write to your accountant for a reference. Your accountant will then be asked to complete the lender’s ‘accountant’s certificate’, which is used to confirm your finances; the lender will look at an overview of the numbers in order to reach a decision accordingly.

It’s important that you sit down with your adviser as soon as possible to discuss your options, so that they can talk you through your choices and the documents you will require.

How do I get my Tax Calculations and Tax Year Overviews?

Your accountant can normally provide these to you from their own software. Alternatively, you can call HMRC and ask for them to be posted to your home address. You can also log in to the HMRC portal online and download them for yourself. (You are required to register for this service via HMRC).

Useful link: HMRC – Self Assessment: General Enquiries

How will lenders treat my income if it varies or has decreased?

Don’t worry – all is not lost! Lenders will want to know that you can sustain your mortgage repayments and therefore assess whether they think you will be able to afford your mortgage into the future.

If your income has varied or has decreased, then it will depend on by how much and for what reason. Increasing is always the best trend. It’s therefore important to discuss this with a mortgage adviser who will be able to advise which lenders will take a view on your income as it stands, and some lenders will happily look at the reasons why the income has changed. As long as there is a plausible and legitimate reason, there is still a good chance of being able to get a self-employed mortgage.

Stisi Group – Trusted Mortgage Experts..

At Stisi Group, we are Trusted Mortgage Experts.. Our unique Customer Obsession programme means that you are our priority, and so we’re with you right through the process, from start to finish. You can take a look at our reviews on VouchedFor and Google to see how we’ve been able to help other clients. We know our business inside and out, and we listen to you to make sure that we give you the advice you need.

Get in touch via the form below or give us a call to find out more about self-employed mortgages and see how much you could borrow. Our advisers will be happy to answer any questions and to go through the whole mortgage process with you.

Call us on 0131 510 1240 or email us at info@stisi.co.ukthen you’re already one step closer to your goal!

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