Mortgage for Self-Employed in the UK

Being self-employed or running your own business (such as a limited company) is becoming an increasingly popular form of employment for many reasons, including the pursuit of better work-life balance and the appeal of being your own boss. Despite common misconceptions, being self-employed doesn’t have to be a barrier to achieving your dream of owning a home. In many cases, buying a house simply requires better organisation.

It’s also a myth that self-employed individuals don’t get mortgages for purchasing properties in the UK on the same terms as employed individuals. Here, different types of confirmation and documentation may be required, but in most cases, the offers will be identical to those for individuals in permanent employment.

Our company specialises in mortgages for self-employed individuals – both for those who are self-employed, in partnerships, or for those who are directors and shareholders in limited companies.

One size doesn’t fit all

To ensure that you can afford to repay a mortgage, potential lenders will want to be sure that the monthly payments will be made on time. This is quite straightforward to predict for those employed on a fixed salary or working on a zero-hours contract (who may be able to apply for a mortgage after just one year of employment), but it’s more challenging for those who are self-employed (Sole Traders, Partnerships, or Limited Companies), who often receive irregular income. Although the criteria may vary depending on the lender, typically, for self-employed individuals, when applying for a mortgage, proof of income in the form of personal tax returns for at least the last 2 years is required (although some lenders may require only one). It’s worthwhile to keep documents in order and ensure that tax returns are filed on time and in the correct format. Some banks and building societies may also require that tax returns be prepared by accountants with the appropriate qualifications – a common requirement for Limited Companies. Individuals who have recently started their own business may have a greater difficulty in obtaining a loan – income from just the last year usually won’t be sufficient, and the repayment terms of the loan will likely be less favourable.

Stay on top of things

It’s understandable that lenders (including banks and building societies) will want to thoroughly analyse your tax returns (known as Tax Calculations) to ensure an accurate assessment of your ability to repay a mortgage. In addition to annual tax returns, be prepared for scrutiny of both business and personal bank statements. Your monthly bills, loan repayments, or credit card payments, as well as expenses for entertainment or lifestyle outings, will also be carefully reviewed. Meeting your commitments on time and understanding the nature of your regular expenses are crucial. That’s why self-employed individuals may sometimes be asked to provide a slightly larger number of documents than those employed on permanent basis.

What will be required for the self-employed and partnerships?

Individuals operating as self-employed (sole traders) or in partnerships will typically be asked to provide a minimum of 2 tax returns for the last completed tax years – here referring to Tax Calculation documents (SA302), which can be generated from their own online account with HMRC. Alternatively, if the tax returns are prepared by an accountant, they can be asked to generate these documents. Additionally, further documents required will include Tax Year Overviews – confirming the tax position for specific tax years.

Some banks and building societies may accept special references from an accounting office instead of the above documents.

Most lenders, in order to determine income considered for affordability purposes, will average the profit shown from self-employment over the last 2 years.

For example:

  • 2022-2023: profit from self-employment – £40,000
  • 2023-2024: profit from self-employment – £50,000
  • (40,000 + 50,000) / 2 = 90,000 / 2 = £45,000

So, based on the example above, £45,000 will be the average of the last 2 years, which for most lenders will be the figure taken into account when calculating affordability.

An exception may occur when the income shown in the most recent tax return is lower than the previous year. In that case, unfortunately, lenders will not consider the average but only the lower income year, as it indicates a downward trend in returns.

There are also solutions available for individuals who have been self-employed for less than 2 years, but for at least 1 full year. Access to offers may be limited, and there may be other requirements, such as regarding the deposit. However, individuals who have recently started their own business may also be considered for applying for a mortgage in the UK.

What are the requirements for individuals running Limited Companies?

Individuals running their own companies in a Limited Company structure will typically have similar requirements to those who are self-employed (as described above). Therefore, most lenders will ask for personal director/shareholder tax returns for the last 2 tax years, and Tax Calculations (SA302) and Tax Year Overviews will be required. Additionally, tax returns for the business, known as Company Accounts, are often also checked for the last 2 tax years of the company.

The income that is most often taken into account is the director’s salary and dividends. The example below illustrates how lenders may consider the income of a limited company director.

  • 2022-2023: 11,000 salary + 34,000 dividend = £44,000
  • 2023-2024: 12,000 salary + 35,000 dividend = £47,000
  • (44,000 + 47,000) / 2 = 91,000 / 2 = £45,500

For some lenders, there may be a different method of calculating affordability for individuals with limited companies – for example, they may base it on the company’s profit (instead of dividends) and salary. This solution may be more favourable for individuals whose companies generate significant profits but whose directors/shareholders receive much lower dividends than the company’s profit shown. An experienced mortgage advisor will be able to determine which form and which lender will be the most suitable solution for your specific case.

A warning sign for lenders may be a reported loss, especially if it is on the most current company return.

Many individuals running their own limited companies who seek advice from us regarding mortgages, mistakenly believe that lenders only consider the declared basic director’s salary. As shown above, dividends or company profits are also typically taken into account. An exception may be directors/shareholders who own less than 20-25% of the company’s shares.

CIS – Construction Industry Scheme

Many lenders also have a different verification process for individuals working in the construction industry as subcontractors under the Construction Industry Scheme, where the contractor deducts tax from each payment. If this is your employment status, remember to inform us in your enquiry, as different forms of income confirmation may be required (e.g. CIS payslips/invoices).

Save for deposit!

Having a large deposit is a great starting point. Not only for obtaining the mortgage itself but also for accessing more attractive offers and potentially reducing monthly repayments. The relationship here is straightforward – the larger the deposit you can contribute when purchasing a property, the more attractive the mortgage offer may be. Additionally, by borrowing a lower amount, you will pay less interest.

The benefits of a higher deposit include:

  • a greater likelihood of obtaining a mortgage
  • borrowing might require a lower credit score
  • lower mortgage repayments and interest rates

So, it’s worth considering saving funds in advance if you want to smoothly obtain a mortgage.

How does the home buying process work in the UK?

The vast majority of properties are sold through estate agencies. The first thing to consider is, of course, the size requirements and your expectations. However, remember not to make hasty decisions – buying a house or another property is a long-term investment and should not be made under the influence of emotions or idealised images from house magazines.

Secondly, there is the so-called rule of three Ls – location, location, location. Location has a huge impact not only on the price of the property but also on commuting options and council tax rates.

The most important stages of the property buying process in the UK can also be discussed during an initial free and non-binding consultation.

We are here to help

Obtaining a mortgage when you are self-employed or run your own limited company may seem like a daunting task. The belief that most banks are reluctant to provide such mortgages due to a lack of a stable source of income is very misleading. It is essential to consult your situation with a specialist who understands mortgages for the self-employed to find the right loan option. Fortunately, you don’t have to search for a lender on your own – we are here to help you find the most suitable solution and tailor the lender offer to your circumstances and type of employment. Buying your own home or another property in the UK when you run your own business doesn’t have to mean ‘mission impossible.’

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

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