The ‘self-employed mortgage’ is a myth. What you’re applying for is no different to other types of mortgage.
Ultimately, all you need is to prove to a lender that you are a safe investment. Then you'll be able to get a rate that you are sure you can afford.
How do lenders define ‘self-employed’ when considering a mortgage application?
If you own 20% or more of a business and are involved in the day-to-day running of that business, then a lender will consider you self-employed. This means you work for yourself and are not an employee working for an employer. You might be a freelancer, contractor, sole trader, or company director. It doesn't matter which, as long as you own a stake in a business that's your main source of income.
Types of self-employment and how they’re assessed
There are three main types of self-employment – the one you come under will determine how the lender assesses your mortgage application.
If you are a sole trader, then you work on your own, for yourself. There's no one else to consider, and this means that once you've paid tax, you keep all the profits. So, firstly, you’ll use self-assessment to declare your income – which is, of course, a requirement every year. HMRC then uses this to calculate your tax. Once you – or your accountant – have done this, you need to request a SA302 form. This will show your exact income and what tax you pay on it. Lenders can then use this figure to determine your mortgage offer.
A partnership is where you work with someone else. Perhaps you own half of the company and your business partner owns the other half. If this is the case, the mortgage lender won't look at it as a whole. They will only look at your individual profits.
When you are self-employed, you have the option to set up as a limited company. This means you'll have your business accounts and personal accounts separate to each other. You are likely to be the director of the company and therefore pay yourself a salary and dividends rather than taking the whole profit. Lenders will take all this into account. They will also consider profits in the business if you own more than 20% of the shares in the company.
What do I need when applying for a mortgage?
There are a few things you will need to be able to show when you are applying for a mortgage, these are:
Two years' accounts
This shows lenders that you can afford to make payments. If you can only account for one year, you might find it harder to prove to a lender that you can meet their requirements.
Having a qualified, chartered accountant working on your accounts convinces lenders that the information provided is reliable and accurate.
You’ll need to be able to show lenders that you have regular work coming in. Unlike those working for an employer, there is a chance you may go periods without work. If you can prove your work is steady, you shouldn't have an issue.
A deposit (5-20%, the higher, the better)
Of course, you need your deposit before applying for a mortgage. It may be tempting to start the process as soon as you have the minimum. But it’s worth saving for a little longer if you can. It will be easier to get a mortgage, and you’ll get a better rate. This is particularly beneficial if you are self-employed so you can show lenders you're able to afford it.
Good credit history
It’s important to have a good credit history whether you are self-employed or not. You can check your credit rating through a credit reference agency and look to improve it before applying for a mortgage. There are various ways to do this, including checking for errors and ensuring you’re on the electoral roll.
As well as showing the above, you’ll need to expand on each as proof that you can afford to make payments and that your finances are in good shape. It’s also worth showing that you can save – so that if you have a period with no work, you can use your savings to make payments. You’ll also need to provide:
- Driving license
- Council tax bill
- Utility bills dated within three months
- Six months’ worth of bank statements
This will prove your identity and your current living arrangements, as well as showing how you are spending your money.
Find out more about improving your credit score with our Know How blog.