Self-Employed

When it comes to being self-employed, obtaining a mortgage can be a bit of a minefield. Traditionally, lenders would require three years’ worth of accounts to consider a mortgage application. Over time, with most lenders this has reduced to two years’ worth of accounts and in some cases an applicant may only need to evidence one year’s worth of self-employed income to make an application. Mortgage applications for the self-employed are not just considered on how many years of accounts you may have; your type of self-employment is just as important. More flexible working arrangements have led to a myriad of categories for lenders to consider. Sole Traders, Limited Company Directors, Contractors, CIS Workers and Partnerships make up a good proportion of self-employed status. Below we will explain how each self-employed category is viewed by lenders, what pitfalls there may be for you and how a Mortgage Expert can help you find the right deal.

SOLE TRADERS

Probably the most common people to fall into a self-employed category are Sole Traders. Sole Traders are usually 100% shareholders of their business and are personally liable for any debt that is incurred to run the business. Typical employment types for sole traders would be builders, painters & decorators, market traders and electricians. Anybody that runs a small business may decide to do so as a sole trader. A sole trader is not required to use an accountant (although it may be a good idea to do so) to submit their tax return and keep records on their behalf regarding their income & expenditure for the business. If an accountant is not used, it is the sole trader’s responsibility to submit their own tax return and show accountability for expenses incurred in running the business.

Most lenders will calculate a sole traders’ earnings from their SA302 Tax calculation which can be downloaded from your individual account within the HMRC self-assessment website. This will need to be accompanied by a Tax Year Overview to ensure that your self-assessment has been properly submitted. Some lenders will require a self-employed reference or certificate from a qualified accountant and three months’ worth of bank statements to support the income evidenced. A lender can also request a full tax return for the tax years in question, so it is worth speaking with your mortgage expert to see exactly what self-employed documents they will need from you.

A sole trader’s tax year runs from 6th April through to 5th April, the same as an employed person. Unlike PAYE employment though, self-employed income is calculated over a full year and this can put you at a disadvantage when applying for a mortgage. Most lenders only require three or six months’ worth of payslips to assess an employed persons income and they will calculate your gross monthly salary and multiply it by twelve rather than calculating income earned for the year to date. This means that employed individuals can have three months salary or less in order to make a mortgage application. It is worth noting that if an individual started self-employment as a sole trader in October 2023, their income could not be properly calculated by a lender until April 2025 because they only have ONE FULL years’ worth of earnings to consider; April 2024 to April 2025. Speak to your mortgage expert for guidance on this.

Lenders generally assess self-employed income and over a two-year accounting period. Most lenders will average those years out if income has increased year on year or will use the lower figure if there has been a minor decrease. If there is a significant decrease it is likely that your application will hit a problem or be declined altogether unless there is a verifiable reason for the decrease. In most cases self-employed income will be assessed on net profit after expenses but before tax and national insurance contributions are deducted.

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SOLE TRADERS 1 YEAR ACCOUNTS

So, what if you do not have a full two years accounts submitted to HMRC and you want to move forward with a mortgage application?

This will make things harder but not impossible. Lenders want to assess how stable a business looks if they are using the income from that business as one of the main factors in their decision making when looking at an application. The more years of accounts that they have to look at, the better it will guide them in their overall assessment. Ultimately, a lender wants their money repaid to them and will always be mindful of the risk involved, because of this most lenders will demand that they have a minimum two years of accounts but there are lenders who will consider a mortgage application with just one year’s accounts as evidence.

This could also lead to a slightly higher interest rate and/or a slightly higher deposit to mitigate the extra risk taken during the underwriting process. A lender may be more comfortable if an individual is moving into a like for like role. If someone who was previously a builder in an employed role wanted to start their own building company and has one year’s accounts available as a sole trader, this will look better in the eyes of the lender as the transition from employed to self-employed makes perfect sense. As mentioned above, there are a number of lenders who will consider one-year account applications but you will need guidance from a Mortgage Expert who excels in this field.

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LIMITED COMPANY DIRECTORS

Are you currently the director of a limited company? Are you unsure of how this may impact your mortgage application or do you just simply require more information relating to your personal circumstances? Don't worry, you've come to the right place.

A limited company is a business in its own right. The owners of the company have a ‘limited’ liability aligned with the investment they have made within the company, hence the name limited. Directors within a limited company will own a proportion of shares within that business and that share can be anything up to 100%. Unlike a sole trader, limited companies will normally need an accountant to complete their accounts and tax returns due to the more complicated structure of the business.

Directors of limited companies are employed by the company and can earn a salary, dividends from company profits or a mixture of both. In general, limited companies are more tax efficient than being a sole trader.

When a lender considers a mortgage application from someone who is a limited company director, they will look at a number of factors. How long the business has been established, how healthy the company’s profits are, what an individual’s shareholding is within the company and how much income the individual has drawn from the company and how sustainable that income is.

Unlike a sole trader whose accounts will run in line with a normal tax year, a limited company can be incorporated at any time and therefore income can be looked at over a full year whether this is April to April or October to October. This can allow income to be looked at in two different ways by lenders, via the company accounts or by an individual’s annual income which would then revert to an April to April assessment. Knowing which route to go down can be confusing and this is where you will need the help of a Mortgage Expert. Make an enquiry and they will be able to guide you and find the right lender for your needs.

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PARTNERSHIPS

Are you part of a partnership and unsure of how to proceed in the property market?

Obtaining a mortgage for someone who is in a partnership is a very similar process to a sole trader. The main difference is that the business is split between two people. Lender’s will want to know what percentage of the business is owned by each partner. This will usually be on a 50/50 basis but this is not always the case. The profit from the business will also usually be split 50/50 but each partner will have an individual tax assessment completed and their income assessed in the same way that it would be for a sole trader. Paperwork wise, SA302’s and Tax Year Overview’s will be a minimum requirement and depending upon an individual’s circumstances, bank statements plus a full SA100 tax return and an accountant reference may also be requested.

As with sole trader’s, the below paragraph is important:

A sole trader’s tax year runs from 6th April through to 5th April, the same as an employed person. Unlike PAYE employed though, self-employed income is calculated over a full year and this can put you at a disadvantage when applying for a mortgage. Most lenders only require three or six months’ worth of payslips to assess an employed persons income and they will calculate your gross salary and multiply it by twelve months rather than calculating from income earned for the year to date. It is worth noting that if an individual started self-employment as a sole trader in October 2023, their income could not be properly calculated by a lender until April 2025 because they only have ONE FULL years’ worth of earning to consider, April 2024 to April 2025.

CIS WORKERS

Are you part of a CIS? Here's a few tips that may help you when applying for a mortgage

Construction Industry Scheme workers (or CIS workers for short) are individual subcontractors who work for a contractor. The contractor will deduct tax weekly, fortnightly or monthly under a HMRC initiative. This spreads the payments out over time rather than having to pay all tax owed in one lump sum at the end of the tax year. Because contributions are collected at source, some people confuse this with being employed when in fact CIS workers are self-employed.

The good news is that CIS workers can fall into two different employment categories when it comes to being assessed for a mortgage. Most lenders will consider you as self-employed and will want to assess your income and the overall application on that basis, requiring the income paperwork needed for a self-employed person.

There are lenders however, who will assess your income on an employed basis and the obvious benefit of this is that they will require payslips rather than accounts. Because tax is paid at source, these lenders will ‘gross up’ your income, which in many cases can inflate a salary when compared to using the self-employed route. Some lenders will require twelve months’ worth of payslips/CIS slips but others will only require six months and in some cases less than that.

The devil is in the detail when considering CIS worker mortgage applications, so it is important that you give as much information as possible when you speak with your Mortgage Expert. They will know which lenders are the right ones to approach regarding your application.

If you fall into any of the above self-employed categories and have any credit issues that are current or historic get in touch and we will organise for a Mortgage Expert to contact you.

As a mortgage is secured against your property, it could be repossessed if you do not keep up mortgage repayments.