For the self-employed, finding the right mortgage can sometimes prove to be more frustrating, expensive and time-consuming than it is for salaried employees. But with some forward planning, and advice from an independent financial planner, there’s no reason why the self-employed can’t get onto - and move up - the property ladder.

It’s been a difficult few years for the self-employed, particularly when planning for big life decisions, like taking on a mortgage. According to a 2021 survey conducted by bank Aldermore, more than a quarter of self-employed people (28%) said saving a deposit had become more difficult because of the coronavirus pandemic, while one in five respondents (18%) had to delay their plans to buy a home.

The survey also reported that almost two thirds (64%) of those asked believed banks treated self-employed people less favourably than salaried applicants. Almost one in three (32%) reported having their mortgage application rejected simply because of their self-employed status.

Lenders tend to expect more proof of income than an employed person

Can self-employed people get a mortgage?

Because self-employed people can sometimes have a varied or unpredictable income, this has created a perception they are somehow ‘risky’ borrowers and therefore unattractive to high street lenders. However, in most instances, this negative perception is wide of the mark.

Fortunately, if you are self-employed, and looking to get a mortgage, there’s no reason to be pessimistic as there are many lending options available to you. But before you make a mortgage application, it’s important to understand the application process and the conditions lenders will typically expect you to meet.

Who is classed as ‘self-employed’?

Whether you are a sole trader, work in a professional partnership, or are a director in a limited company, mortgage lenders will treat you as ‘self-employed’. The same applies to freelancers and independent contractors.

You will also be considered as self-employed if you own more than a 20% share of a business and this business is your main source of income.

What proof of self-employed income is needed?

Since ‘self-certification’ mortgages were banned in 2014, it’s no longer possible to simply tell a lender how much you earn without providing detailed evidence of your income. And because self-employed people often have fluctuating incomes, lenders tend to expect more proof of income than an employed person is required to provide.

For example, an employee under the Pay As You Earn (PAYE) system usually needs to provide three recent payslips and three months of bank statements as proof of income. By contrast, a self-employed applicant will be expected to provide at least two years of accounts for the business (certified by a professional accountant), as well as annual statements from HMRC (known as an ‘SA302s’) that provide evidence of your income based on your annual Self-Assessment tax return.

In some instances, you’ll need to either contact HMRC directly to have your SA302s sent directly to you (which can take some time). Alternatively, if you complete your Self-Assessment electronically, you can download SA302s via your online HMRC account. If you use cloud-based accounting software such as Xero or Quickbooks, to handle your business finances, most mortgage lenders will accept a downloaded report of your tax breakdown.

If your self-employed income is inconsistent, or if your business operates seasonally or was severely affected during the pandemic, lenders may need more information to satisfy themselves that you can keep up future mortgage payments. They may ask for written evidence of any client contracts or customer agreements that are in place for future work. If you think these may be helpful during the application process, make sure you have them to hand.

Provided you can supply enough information about your earnings you won’t necessarily end up paying more

How much can self-employed mortgage applicants borrow?

After a mortgage lender has determined your income, they will also review your regular financial income and outgoings, your credit history and – crucially – the size of your deposit, to arrive at how much you are eligible to borrow. Most will also have a mortgage calculator on their website, which you can use to check how much you could afford to borrow and what your monthly repayments would be.

Affordability is critical when it comes to organising your mortgage. After all, lenders have the right to repossess your home if you don’t keep up the repayments on your mortgage.

Are mortgages for the self-employed more expensive?

If you’re self-employed, you won’t necessarily end up paying more for your mortgage. Provided you can supply enough information about your earnings, and can demonstrate your ability to keep up your mortgage repayments, there’s no reason why you won’t be able to find a mortgage as easily as someone with a similar salary in a permanent full-time job.

Even if proving your earnings is complicated, or if your earnings dipped during the pandemic, there are several specialist mortgage lenders on the market who regularly deal with self-employed borrowers that may still be able to help.

But if you are self-employed and want to give yourself the best chance of getting the best possible mortgage for your circumstances, it’s worth following these important steps.

Step 1: Build up a big deposit
Whether you are self-employed or salaried, the best mortgage deals are usually made available to borrowers with larger deposits. Having a deposit of 20% or more will ensure you have access to a wider range of mortgage rates to choose from.

Step 2: Boost your credit score
It’s essential to know your credit score before you make an application. That way, you can repair your score if you need to – by paying off short-term debts such as loans and credit cards, and making sure you are recorded on the electoral register.

Step 3: Get your documentation in order
As already mentioned, you’ll most likely be asked for at least two years’ worth of business accounts before you make an application. So, it’s well worth making sure that your bookkeeping and records are up to date. If you don’t use an accountant, it might be worth talking to one to get your accounts certified.

Step 4: Talk to a financial adviser
People are often in such a rush to secure the mortgage on their new home that they forget about shopping around, and simply make an application through their bank or building society. That may not prove to be the best route to take, and could mean you miss out on a more appropriate deal for your circumstances.

A professional financial adviser will be able to talk you through every stage of the application process, and then compare mortgages from the entire marketplace. A financial planner can also help you find a specialist mortgage lender with experience of lending to the self-employed, should you need it.

Amber River – helping with your life planning decisions

At Amber River, our independent financial planners understand the specific (and sometimes complicated) needs of the self-employed. They will work with you to assess your financial situation, determine the mortgage options available to you and, when everything is in place, help you to secure the best available mortgage to suit your circumstances.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.