Posted 1 Jul 2019

The challenges of securing a self-employed mortgage

If you’ve only been self-employed for a year and have just 1 years’ worth of accounts, it can be tricky to secure a mortgage deal. This is mainly because a lender might not be able to determine how much you actually earn, making you a financial ‘risk’ to them, as there is a degree of uncertainty regarding whether or not you can afford to pay back what you have borrowed.

Most lenders prefer to only give mortgages to those that have been successfully self-employed for three years or more, and without the option of self certification mortgages where you can declare what you earn without any proof, it can be tough for those starting out in the world of business.

However, with the number of entrepreneurs and start-up businesses on the increase, many lenders are becoming more flexible with who they loan money to, and some even specialise in mortgages for self-employed people and directors – even if you’re only just starting out and have been trading for nine months to a year. It is possible to secure a mortgage deal with just 1 year’s worth of accounts or less, but these deals are normally quite rare, and only available through a small number of particular lenders.

It also doesn’t matter what industry you work in – lenders will consider self-employed people with various types of career. Whether you are setting up a limited company or a sole trader working from home, there is a mortgage deal to be found.

How much can I borrow on a mortgage if I only have 1 year’s worth of accounts?

Depending on your credit score, if you are self-employed, you can borrow as much as a full-time permanent employee, which can be anywhere between 3 and 5 times’ your annual income. In some circumstances, you can give a lender projections for how much you will earn in future. For instance, if you have only been trading for 6 months, you could offer projections for the next year. However, a lender may also request a qualified accountant’s projection of your earnings for greater security and clarity.

How do I prove my income with just 1 year’s accounts?

In all likelihood, if a mortgage lender will accept just 1 year’s worth of accounts, they will need these accounts to be provided by a qualified or chartered accountant, who can also provide detailed self assessment tax returns (SA302) regarding your income. If you are a sole trader, or working with a partner, your application is assessed based on the ‘total income received’ figure on a self-assessment tax return. If you are a director of a company, your income and application will be assessed by the dividends and salary received on your accounts and bank statements.

Who can get a mortgage with 1 year’s accounts?

Lenders will potentially offer a mortgage deal to sole traders, limited company directors and contractors who have been trading between 9 and 12 months. It is also possible to secure such a mortgage deal even if you have a poor credit rating, although your interest rates might be high. If you are purchasing a property through Help to Buy, you will also be considered, but will need to put down at least 5% deposit to secure a 95% mortgage.

Can I get a mortgage if I have less than 1 year’s accounts?

If you have not yet completed a tax return for your first year of trading since becoming self-employed and starting a business, it is very unlikely that you will be considered for a mortgage. There are a few lenders out there that will consider applications with only 9 months’ worth of figures, but being accepted is very rare. Lenders generally only let borrowers take out mortgages after proof is submitted to them that indicates the loaned money can be paid back. If, however, you are coming up to obtaining your first year’s worth of figures, it is advisable to get an agreement in principle so that you can make a formal application when the time comes, as an agreement in principle generally lasts for up to three months.

Can I get a mortgage with 1 year’s worth of accounts, even if my credit rating is poor?

There may be restrictions on the type of mortgage you can take out if your credit rating is poor and you only have 1 year’s worth of accounts for the company you have set up. A lender will also ask for you to have a higher deposit, as you will be considered a greater ‘risk’ to them due to your credit history. They may ask for 15 or even 20%. Typically, most lenders prefer borrowers to have had no defaults, missed payments on a mortgage, debts or CCJ’s within the last two years.

If you have recently turned self employed and/or started a new business with between 9 and 12 months of accounts, contact us today at iam mortgages where we can help to put you in touch with the right lenders offering mortgage deals that suit your circumstances. There’s no charge – our advice is completely free and impartial. Give us a call or fill in our easy contact form.