Traditional mortgage lenders often require applicants to provide several years’ worth of income history, which can prove challenging for those who have recently become self-employed. However, there’s good news: obtaining self-employed mortgages with 2 years’ accounts is not only possible, but it’s also becoming increasingly common. This guide will provide essential insights into how to secure a mortgage with two years of self-employment accounts, the potential hurdles you might encounter, and how to overcome them. Whether you’re a freelancer, a contractor, or a business owner, this guide will help you understand the key steps towards owning your dream home.
Yes, it is possible to get a mortgage if you are self-employed and have two years’ worth of accounts. Many lenders in the UK will accept two years’ worth of accounts as proof of income, though this can vary from lender to lender.
However, it’s important to understand that getting a mortgage while being self-employed can be a bit more complicated than for someone who is employed. This is because lenders want to ensure that you have a stable, reliable income, which can sometimes be more difficult to prove when you’re self-employed.
Lenders typically look at your profits if you’re a sole trader or in a partnership, and at your salary plus dividends if you own a limited company. If your income varies significantly from one year to the next, they might use an average of the two years’ figures, or they might use the lower of the two.
Here are the steps you can follow to get a mortgage as a self-employed individual with two years’ accounts:
Prepare Your Accounts: It’s advisable to have a certified or chartered accountant prepare your accounts to give lenders more confidence in your financial reports. Make sure your accounts are up-to-date and as accurate as possible.
Work Out Your Income: If you’re a sole trader or in a partnership, lenders will typically look at your share of the profits. If you’re a director of a limited company, they’ll look at your salary and any dividends.
Improve Your Credit Score: A good credit history is key to securing a mortgage. Pay off outstanding debts, make sure you’re on the electoral roll, and avoid applying for new credit in the run-up to your mortgage application.
Save a Significant Deposit: The bigger your deposit, the lower the risk you pose to the lender. This could also help you secure a better interest rate.
Organise Your Paperwork: Lenders will want to see proof of your income. This usually includes two to three years’ worth of accounts, SA302s or tax year overviews, and bank statements. If you’re a director of a limited company, you may also need to provide company accounts.
Get a Decision in Principle (DIP): This is a certificate or statement from a lender to say that, in principle, they would lend a certain amount to you based on the information you’ve provided.
Choose a Suitable Mortgage: Consider seeking advice from a mortgage broker, especially one who specialises in self-employed mortgages. They can help you find a lender who’s comfortable with your situation and find the best deals available to you.
Complete the Application: Once you’ve chosen a mortgage, you’ll need to fill out the lender’s application form. The lender will then conduct a full affordability assessment. This will involve a credit check and might involve an interview.
Many major banks and building societies in the UK are willing to consider mortgage applications from self-employed individuals with at least two years of accounts.
Here are a few examples of lenders:
1. Halifax: Halifax generally asks for a minimum of two years’ accounts or tax returns. They usually take the average income of the last two years if your income has increased.
2. Barclays: Barclays requests at least two years’ worth of accounts or SA302s and may also accept projections for the current year if your income fluctuates.
3. Santander: Santander typically requests the last two years of accounts or tax returns.
4. Nationwide: Nationwide usually asks for two years’ worth of accounts or tax returns.
5. HSBC: HSBC typically requires two years of full accounts or tax returns.
6. Clydesdale Bank: They also usually require two years’ worth of accounts, and they have been known to be friendly to self-employed applicants.
In addition to the mainstream banks and building societies, there are also specialist lenders that specifically cater to the self-employed and those with complex incomes. These include lenders like Kensington, Precise Mortgages, and The Mortgage Works, among others.
Remember, the approval process doesn’t solely depend on having two years’ accounts; lenders also consider your credit score, the size of your deposit, your outgoings, and other financial circumstances.
The amount you can borrow as a self-employed individual seeking a mortgage will depend on a variety of factors, not just the two years’ worth of accounts. Lenders will look at these accounts to assess your income, but how they calculate it can vary.
Typically, if you’re a sole trader or in a partnership, lenders will look at the profit you’ve made. If you’re a director of a limited company, they’ll typically consider your salary plus any dividends you’ve received.
Once they’ve determined your income, most lenders will then apply a multiple to calculate how much they’re willing to lend. This is typically around 4-4.5 times your income, though some lenders might go up to 5 or even 6.0 times in certain circumstances.
So, for instance, if your average income over the last two years was £50,000, a lender might be willing to lend between £200,000 and £225,000, potentially more with some lenders.
Getting a mortgage with less than two years’ accounts can be challenging, as most lenders prefer to see at least two to three years of accounts to verify the stability of your income. However, it’s not impossible, and there are a few steps you can take to increase your chances of getting approved.
Find a Specialist Lender: Some lenders, often smaller or specialist lenders, are willing to consider applications from self-employed individuals with less than two years’ accounts. These lenders often look at cases on an individual basis rather than following a strict set of criteria.
Provide Other Proof of Income: If you have less than two years’ accounts, you could also provide other proof of income. This could be contracts showing future work, or if you’ve recently become self-employed, you could provide payslips from your previous employment.
Increase Your Deposit: Having a larger deposit can help to mitigate the lender’s risk. If you can offer a deposit of 20% or more, lenders may be more likely to consider your application.
Clean Credit History: Having a clean credit history is especially important when you have less than two years’ accounts. Make sure all your bills and other credit agreements are up-to-date and paid on time.
Prepare a Business Plan: If you’ve recently become self-employed and don’t have two years’ accounts, a solid business plan showing projected earnings could help. This is more likely to be useful if you’re working in a field where you have a lot of experience, or if you have contracts already in place.
Use a Mortgage Broker: Mortgage brokers have expertise in finding lenders who are willing to work with different types of borrowers. A broker who specialises in self-employed mortgages will be aware of which lenders are more likely to consider your application.
When applying for a mortgage as a self-employed person, lenders will need to see evidence of your income and the stability of your business. Here’s a list of some of the key documents you might need:
Accounts: As a self-employed applicant, you’ll need to provide at least two years’ worth of accounts in most cases, though some lenders may accept one year with other supporting evidence. These should be prepared by a certified or chartered accountant.
SA302 Forms: An SA302 is a response from HMRC that provides evidence of your annual income, based on your self-assessment tax return. Lenders typically ask for these for the last two to three years.
Tax Year Overviews: This is a summary from HMRC that shows the tax calculated for the tax returns submitted. You can print them off from the HMRC website.
Bank Statements: Lenders will often want to see your personal bank statements, and possibly your business bank statements as well, for the last three to six months. These allow them to see your spending habits and whether your income and outgoings match the figures you’ve declared.
Proof of Deposit: You’ll need to be able to demonstrate where your deposit is coming from and that it’s available for use.
Identification and Address Verification: This will usually be a passport or driving licence, and a utility bill or council tax statement for address verification.
Business Details: If you own a limited company, you may also need to provide details of the company, such as its registration number and any relevant company accounts.
Evidence of Ongoing Work: For those with less than two years’ accounts, contracts or invoices showing future work can be useful.
In addition to having at least two years’ worth of accounts and the necessary supporting documentation, there are a few other criteria that you’ll need to meet to be eligible for a mortgage as a self-employed individual:
Credit Score: Having a good credit score is crucial. This shows lenders that you’re reliable and have a history of repaying your debts on time. If your credit score is poor, it may be worth taking some time to improve it before applying for a mortgage.
Age: While it varies between lenders, many have an upper age limit for when the mortgage term should end. This is typically between 70 and 85.
Residency: Most lenders will require you to be a UK resident and have the right to live in the UK. Some might also require you to have lived in the UK for a certain number of years.
Deposit: The minimum deposit usually required is around 5% of the property’s value, but for self-employed applicants, it might be higher, and the more you can put down, the better terms you’ll likely receive.
Affordability: Lenders will look at your income and outgoings to make sure you can afford the mortgage repayments. This will include household bills, childcare, personal expenses, and any outstanding debts.
Stable Income: Although income can fluctuate when you’re self-employed, lenders like to see a stable income. If your income varies significantly, lenders may use the lower figure or an average to calculate affordability.
Business Profitability: If you’re a company director, lenders might look at the profitability of your business as part of their decision-making process.
Industry Experience: Some lenders may want to see that you have experience in the industry in which you’re self-employed. This is especially true if you’ve recently started a business
As a self-employed individual, you shouldn’t necessarily have to pay higher interest rates on a mortgage than someone who is traditionally employed. Mortgage interest rates are generally determined by factors such as the size of your deposit, the length of the mortgage term, the type of mortgage (fixed, variable, tracker, etc.), your credit score, and the overall lending market conditions.
However, your choice of lenders may be more limited as a self-employed person, particularly if you have less than two years’ worth of accounts. Some lenders may perceive self-employed borrowers as higher risk, which could result in less competitive rates being offered, or stricter lending criteria.
It’s crucial to compare different mortgage offers before deciding. Look at the overall cost of the mortgage over the term, not just the interest rate. And always make sure that the mortgage payments are affordable for you.
Getting a mortgage with a poor credit history can be challenging, whether you’re self-employed or traditionally employed. Lenders see a poor credit history as a sign of higher risk, and this can result in more stringent lending criteria or even a declined application.
However, if you’re self-employed and have two years’ accounts, it’s not impossible to secure a mortgage, but it may take some extra effort.
Before applying for a mortgage, it might be worth taking some time to improve your credit score. This could involve paying off outstanding debts, making sure you’re on the electoral roll, and not applying for new credit in the lead-up to your mortgage application.
Yes, contractors and freelancers can obtain a mortgage with two years’ worth of accounts, but there may be additional considerations or challenges compared to those who are employed full time.
Income Assessment: For contractors, some lenders may multiply your daily or hourly contract rate by the number of working weeks in a year (typically taken as 46 or 48 weeks to account for holidays). For freelancers, lenders will typically look at your net profit. In either case, having two years’ worth of accounts can help prove income stability.
Nature of Work: If your contracting or freelancing work is in an industry known for its volatility, or if your income significantly fluctuates, lenders might be more cautious. However, if you can demonstrate a steady stream of future contracts or work, this may alleviate some of their concerns.
Industry Experience: If you’ve been a contractor or freelancer for two years, but you’ve worked in your industry for a longer period, make sure to highlight this. Lenders might consider your entire history in the industry, not just your time as a contractor or freelancer
Shared Ownership: Under this programme, you can purchase a share of a property (between 25% and 75%) and pay rent on the portion that the local housing association owns. You can buy more shares as you can afford to, in a process known as “staircasing.”
Lifetime ISA: A lifetime ISA allows you to save up to £4,000 per year towards your first home (or for later life), and the government will add a 25% bonus to your savings.
First Homes Scheme: This is a new initiative designed to help first-time buyers and key workers buy a home in their local area for a discount of at least 30%.
Right to Buy: This scheme allows council or housing association tenants to buy their home at a discount. However, it’s only available in certain parts of the UK.
All of these schemes have their own eligibility criteria and restrictions, and not all of them may be available to you depending on your circumstances. You’ll still need to secure a mortgage for the proportion of the property’s price not covered by your deposit or the scheme, so having at least two years’ accounts can be helpful.
As a self-employed person, you would have access to the same government schemes as someone who is employed, provided you meet the eligibility criteria of each specific scheme. It’s recommended to get financial advice to understand which scheme is most suitable for your circumstances.
Speaking with a mortgage broker who specialises in self-employment can significantly help you navigate the mortgage application process. They understand the unique challenges faced by self-employed individuals when seeking a mortgage and can guide you accordingly.
Here’s how you can benefit from a specialist broker:
1. Knowledge of the Market: A specialist broker will have extensive knowledge of the mortgage market and understand the lending criteria of different lenders, some of whom may not be directly accessible to the public. They can identify lenders who are more likely to accept applications from self-employed individuals with two years’ worth of accounts.
2. Application Support: They can help you prepare your application, ensuring that you present your financial situation in the best possible light. They can advise you on the kind of documentation you’ll need and help you understand how your income will be assessed.
3. Time and Effort Saving: Finding the right mortgage as a self-employed person can be time-consuming and stressful. A broker will do the legwork for you, saving you time and potentially money in the long run.
4. Access to Better Rates: Brokers often have access to exclusive deals that aren’t available to the general public. This means they might be able to secure a more favourable interest rate on your mortgage.
5. Advice and Guidance: They can provide tailored advice based on your unique circumstances and answer any questions you have about the process.
6. Post-Application Support: They can also help manage the process after you’ve submitted your application, liaising with the lender, solicitors, and surveyors to ensure everything goes smoothly.