Can I get a self-employed mortgage with just one year’s accounts?

Why High Street lenders often say no

Most high street banks and building societies, at both branch and call centre levels, have lending criteria set in stone. These policies often require self-employed applicants to have at least two to three years of trading history.

As there are no set guidelines for lending to self-employed workers, each lender assigns its own lending risk levels. As such, many view a business with only one year’s trading as a high financial risk. That’s because the business doesn’t have enough proof of the applicant’s continued income to satisfy branch-level lending criteria.

This approach is, in our experience, outdated, and shows an unfair bias towards PAYE employees. That’s why we’ve been championing all types of independent professionals since our inception in 2004.

We know that many self-employed professionals earn high, stable incomes. They’re often also more acutely aware of their finances, so manage them responsibly. Therefore, the difficulty is not a self-employed person’s financial position. Rather, it’s the rigid criteria applied by mainstream lenders.

Specialist lenders take a different approach

Our network of more than 30 specialist lenders assesses each application individually. This process is known as manual underwriting, and each lender has its own unique approach. An experienced adviser or underwriter will therefore review on merit rather than by rigid algorithms.

Some of these lenders are mainstream, whilst others don’t operate on the high street. But even those familiar lenders are often off-limits to the general public (no matter how you work). That’s because these lenders realise that self-employed income has more connotations than straightforward PAYE income.

Different payment structures require different understandings of how income works. Therefore, they need a nuanced approach to work out mortgage affordability, depending on whether you’re a:

• Sole trader
• Freelancer
• Limited company director
• Day-rate contractor

And, because of this complexity, many of these specialist mortgages are only available through specialist brokers. That’s because a specialist broker will handle much of the vetting of each applicant before submitting their mortgage application.

It’s at this part of the process where we come in. Once our brokers have had an introductory chat with you, they’ll know which lender’s criteria most suit your unique position. Based on this knowledge, we understand how to present your application clearly and compellingly so that an underwriter can assess your true mortgage affordability.

What documents will you need to prove mortgage affordability?

Proof of your income won’t come from a regular payslip. As such, lenders require official documentation to verify your earnings. If you’ve completed your first full financial year, you will typically need to provide:

For Sole traders, freelancers and company directors:

• Finalised accounts, signed off by a qualified accountant
• SA302 (Tax Calculation) — an HMRC document that summarises your declared income
• Tax Year Overview — a further HMRC document confirming that the tax due on your income has been paid

You can download your SA302 and Tax Year Overview directly from your HMRC online account or ask your accountant to provide them on your behalf

For day-rate contractors:

• A copy of your contract, showing its duration and remuneration
• confirmation of a contract extension If your contract has less than 4-6 weeks left to run

In both cases, you’ll also need to present the last 3-6 months’ worth of personal and business bank account statements (varies by lender). You’ll also need to provide a utility bill to verify your address and a photo ID.

What lenders don’t insist upon, but we highly recommend, is getting a copy of your credit report. It lets you see what underwriters will see when they run their credit checks.

Get your credit report(s) well in advance of your mortgage application. It always amazes me how many applicants don’t. Here’s why it’s one of the most important documents in the application process.

How lenders calculate your income

If you walk into a high street branch, an adviser will try to assess your income using their standard self-employed policy. That’s because, at branch or call centre level, they tend not to differentiate between different types of self-employment. You’re either employed or self-employed, and are therefore subject to the lender’s respective lending criteria.

That’s where specialist lenders differ. Here’s a generic overview of how they appraise the income of each type of self-employed worker:

Sole traders and freelancers

Specialist lenders will incorporate your net profit into their mortgage affordability calculations. So, that will be your total income minus your business expenses as a starting point.

It’s often tempting to claim expenses against tax. But it’s not such a good idea to claim too many if you’re applying for a mortgage. The more expenses you claim, the lower your declared profit will look to an underwriter. This, in turn, will reduce how much you could potentially borrow for a mortgage.

Limited company directors

Traditional lenders typically work out what you can afford to borrow on your salary plus dividends. However, they fail to grasp that most directors pay themselves a modest salary for tax efficiency purposes. Therefore, this approach frequently understates what directors can actually afford to borrow.

Specialist lenders take a less narrow-minded view. They understand why contractors operate in this tax-efficient way. With this added flexibility, they can incorporate your share of the company’s net profit into their calculations. Incorporating profits, they can often offer a substantially higher loan amount than they can with salary and dividends alone.

Day-rate contractors

For contractors working on a fixed day rate — whether through a limited company, an umbrella company, or another arrangement — specialist lenders use a method called contract-based underwriting. This method doesn’t require accounts or SA302s.

Instead, they calculate an equivalent annual salary based on your gross daily contract rate:

Day rate × 5 days × 46 weeks = Annualised income

The resultant figure lenders then use to determine how much you may borrow. If a lender asks to see your accounts when you have explained that you are a day-rate contractor, it’s a strong indication that they are not the right lender for your circumstances.

Since 2004, we’ve gained experience in advising contractors across a wide range of day-rate contracts. Our lenders understand the workings of IT contractors, Oil & Gas contractors, umbrella company employees, CIS contractors, and zero-hours contractors.

How much could you potentially borrow?

Once your income has been established, lenders apply what is known as an income multiplier to calculate the maximum loan available to you.

• Sole traders and freelancers: Typically up to 5 times your annual net profit
• Contractors: Typically up to 5.5 times your annualised income, and in exceptional circumstances, up to 6 times

For example, an annualised income of £40,000 could support a loan of up to:

• £200,000 for a sole trader
• Typically up to £220,000 for a contractor

Please be aware that other factors may result in a lower multiplier being applied, namely:

• Outstanding debts
• A limited/poor credit history
• Other financial commitments that affect your disposable income.

Will lenders consider future/projected income?

In some circumstances, if your paperwork supports it, yes. If your second year of trading is showing clear signs of growth, your accountant can provide a written projection of your expected income for the year ahead. This could be due to securing a significant new client or to an increase in your rates.

Certain specialist lenders will accept this projection as part of their affordability assessment. If so, it may allow you to borrow more than your first year’s figures alone would suggest.

Why a specialist broker is essential

Branch-based advisers, telephone call centres and vanilla mortgage brokers are unlikely to have access to specialist underwriters. It’s these underwriters who’ll be able to make the most of your income.

As a specialist broker, Freelancer Financials serves as the connection between you and those underwriting teams.

Even after our first confidential chat, our experienced brokers are likely to know which lenders are best suited to your situation. Moreover, they’ll know how best to present your application to clearly demonstrate your true mortgage affordability.

Even if you think your income structure is overtly complex, we can help. Our established relationships with specialist underwriters enable us to make your case directly.

Being self-employed is a legitimate and often financially rewarding career path. It shouldn’t stand in the way of homeownership. With the correct documentation and the right broker on your side, a mortgage based on one year’s accounts is entirely achievable.

If you’d like specialist advice from a broker who knows how to get the best possible deal for self-employed workers, get started here.