UK mortgage for the Self-employed - questions and answers

Self-employment is very popular in the UK, with an estimated 4.38 million people doing business in this form. While self-employment usually means more freedom to plan your work and higher earnings, there are also negative consequences to consider. One of these is more difficult access to mortgages and potentially lower creditworthiness. So let’s find out what the mortgage application process is like for the self-employed and how to prepare for it.

When is a mortgagee treated as self-employed?

Defining self-employment is not at all easy. On the one hand, HMRC introduces criteria such as no supervisor, few clients, unregulated working hours and doing Self Assessment tax returns, while on the other hand, each creditor can set its own terms. For example, owners of shares in Ltd companies are also considered to be self-employed, but only if the total exceeds 20% of the total and the income from their ownership accounts for the majority of the borrower’s income.

When is a mortgagee treated as self-employed?

In some cases, the differences in definitions can be very significant - one bank may consider you to be a full-time employee, while another will see you as an entrepreneur. This can translate into the terms of the offer offered to you and, consequently, the amount of your mortgage repayment.

Application for mortgage by a self-employed person - documents

Those with self-employed status must of course document their income. Typically, lenders require the submission of tax returns (Self Assessment, SA302) for the past 2 years (Source: Nerdwallet). In our experience, on the other hand, banks rarely ask for older documents, but this may be the case if the entrepreneur’s income in one of the past two years was very low.

In theory, it may also be the case that at the Decision in Principle stage you will be asked to produce documents that further substantiate your income and future prospects. An example of this would be contracts with contractors. Most often, banks ask for additional information if the borrower has been in business for less than 2-3 years.

Does every bank extend mortgage to self-employed people?

It may be assumed that this is the case, but in practice, the situation is a little more complicated. As Experian notes, in the UK, no bank will turn down a mortgage solely because an applicant is self-employed. However, it is important to remember that each lender introduces individual risk assessment criteria and the process can be more or less stringent. In practice, some banks and credit unions may have an offer so structured that no self-employed person will be satisfied with it.

Does every bank extend mortgage to self-employed people?

There will also be differences in terms of risk assessment. Each lender may assess the situation in a particular sector of the economy differently. However, as a general rule of thumb, self-employment involving the sale of seasonal goods or services will raise more objections than running a local grocery shop or accountancy office. The more stable your business is, the easier the decision in principle should be.

To complete the picture, let us also add that there are banks that specialise in lending to the self-employed. Their choice, even at the expense of slightly worse repayment terms, may be a good one if your situation is not obvious or your business profile is atypical.

How is the creditworthiness of a self-employed person calculated?

One of the characteristics of self-employment is less stability of income compared to a full-time job - it is not uncommon for entrepreneurs to live on just one payment for several months, or to receive dozens of payments every day. For this reason, calculating affordability on the basis of the last three months’ income as in the case of employees is unreliable and does not make sense.

How is the creditworthiness of a self-employed person calculated?

As we have already mentioned,** the vast majority of banks calculate the creditworthiness of entrepreneurs on the basis of their tax returns, the Self Assessment. **Sometimes, the applicant may also be asked to provide bank statements, so that the mortgage underwriter will be able to better understand the real financial condition of that person.

However, the proportion of the mortgage amount to your earnings remains constant - whether you are an entrepreneur or an employee, you are able to borrow between approximately 400% and 500% of your annual income. Your creditworthiness also depends on your expenses and, in particular, on the instalments of any mortgages, loans or leases.

If I am self-employed, do I need a larger deposit?

As a rule, no. Regardless of your source of income, it is highly likely that you will be able to obtain a mortgage for 95% of the value of the house you are buying, provided, of course, that your creditworthiness is sufficient. Banks do not differentiate between their customers in this respect.

Can a self-employed person apply for a mortgage jointly with an employed partner?

Of course they do! Banks do not impose any restrictions in this respect. It is also perfectly acceptable for one spouse to employ the other in his or her own business. From a creditworthiness assessment perspective, the only thing that matters is whether, as a couple, you are able to pay the mortgage instalments and whether your income is stable.

Is it possible to get a mortgage in the UK if you have debts with HMRC?

It depends. As a self-employed business owner, you are required to file a Self-Assessment by 31 October, but the tax deadline is 31 January. Your documents may therefore show that you have an outstanding tax liability during your mortgage application, which does not result in any breach of the regulations.

Is it possible to get a mortgage in the UK if you have debts with HMRC?

However, your tax situation does affect your credit position - your mortgage underwriter will treat your liabilities to HMRC on a par with other mortgages or leases. If your tax due date is imminent and the amount is a significant part of your monthly income, you face an increased risk of your mortgage application being rejected.

It will be much worse if you apply for a mortgage after the tax deadline has passed. Such an event is, in the eyes of analysts, treated on a par with a default on mortgage repayments and drastically reduces your chances of buying a property. You might even be tempted to say that problems with HMRC or unpaid NICs (national insurance contributions) have an even worse impact on your credit score, as they can lead to you being slapped with administrative penalties.

Does self-employment prevent you from getting help from government aid programmes?

None of the well-known borrower assistance schemes exclude the self-employed. If you run your own business you can have First Time Buyer status, as well as applying for a council property under Right to Buy and Right to Acquire.

In practice, many people with self-employed status are unable to benefit from assistance due to their income exceeding the set thresholds. However, if you are in a difficult financial situation and want to free yourself from rent, the government and public administration are ready to help you.

How do I prepare to take out a mortgage if I am self-employed?

Finally, we would like to mention some important details to consider when applying for a mortgage.

Make smart insurance decisions

We are aware that buying any insurance involves an increase in the cost of living, and you also have to remember to pay your premiums regularly. On the other hand, self-employment usually means a rather unstable financial situation - over the course of several consecutive months, you may face a drastic decrease or increase in your income, and in the event of an accident, your employer will not pay you any benefits. For this reason, it is worth seriously considering income insurance.

Make some more savings

We know that, in the vast majority of cases, our clients do everything possible to buy their own home as soon as possible and stop wasting money on rental properties. While this is perfectly understandable, it is not always worth rushing. If your income is clearly fluctuating from month to month, preparing an additional financial cushion that will allow you to comfortably pay a few mortgage repayments will greatly increase your mental comfort level.

Make some more savings

If you would like to learn more about the consequences of late mortgage repayments, please read the extensive post we dedicated to this issue.

Realistically assess whether you can afford the house you want to buy

This point is basically a derivative of the previous two - practice shows that many business ventures fail after a while. By paying lower mortgage instalments, you lower your fixed expenses, so your family will be better prepared for any problems in your business.

Use specialists who have been dealing with mortgages for many years

As an entrepreneur, you surely know that time is the only resource that cannot be recovered, bought or recreated. By choosing to use the services of a trusted mortgage advisor with over seven years of experience, you will not only gain the lowest possible interest rate - you will also save time, which you will be able to devote to doing what you know best. Your first consultation with an Extend Finance advisor is always free of charge, and within minutes you will find out, among other things, what your creditworthiness is, how the whole process of buying a property in the UK works, and how much cash you need to realise your dream of owning your own home.