Self-Employed Mortgages - The Essential Guide

How much can I borrow?

The maximum amount you can borrow to buy a property varies between lenders, and depends on your circumstances. Many are happy to lend at a multiple of 4.5 x single or joint earnings.

A few lenders will only go up to 4 x income, whilst others will work to a multiple of 5 or even 6 for high earners and/or those working in professional roles, such as doctors, actuaries, architects and solicitors.

It's important to remember the income multiple is a maximum borrowing amount. Before applying for a mortgage, consider whether you actually need or want to borrow the maximum amount a lender will permit.

Stricter mortgage lending criteria

The way lenders assess mortgage loan applications has changed.

Reckless mortgage lending in the run-up to the 2008 financial crisis, including self-certified mortgages (a.ka. 'liar loans'), led the government to launch the Mortgage Market Review (MMR), an industry-wide examination of UK mortgage regulation. As a result, tougher rules and regulations came into effect in 2014.

Stress-testing mortgage affordability

The new regulations' purpose was to avoid mortgage borrowers getting into financial difficulty by taking out potentially unaffordable loans.

One of the biggest changes was the mandatory requirement for lenders to 'stress-test' an applicant's ability to afford the mortgage payments on a property purchase.

The stress test is designed to assess whether the mortgage is affordable, even if the interest rate were to rise to 3% above the lender's standard variable rate (SVR), although this will fall to 1% above SVR from August 1st 2022. As part of the affordability assessment, lenders check:

1. your credit score and history
2. the number of financial dependents you have, if any
3. your monthly expenditure

Financial dependents can be your children or elderly relatives. As you'd expect, younger children are considered a greater financial commitment than teenagers. On the plus side, they tend to be slightly lower maintenance...so every cloud!

The importance of reducing credit commitments

Mortgage companies will investigate your spending habits thoroughly, by checking bank statements and running credit checks.

An area of spending they particularly focus on, is what's known as 'committed expenditure'. In other words, any payment you are locked into, for a period of time.

Credit commitments are a good example, and any unsecured loans, car finance or credit card debts could affect how much you can borrow, or even whether you can borrow at all. So if you can reduce or clear them before applying for a mortgage, it's a good idea to do so.

There are many other types of committed expenditure, including spousal support, child maintenance, and school fees.

What mortgage deals are available to the self-employed?

The same deals as those for employed applicants. One or two loan providers have dedicated self-employed mortgage ranges. But generally, the same products are available, regardless of employment status.

Self-employed borrowers can also get an interest-only mortgage if you have sufficient deposit.

What's different is the way a self-employed person's income is assessed for a mortgage, and the length of time they need to be trading for is longer than someone needs to be in an employed position.

How is my income assessed for a mortgage?

How your income is assessed will depend on the lender's criteria, and the structure of your business. But these treatments are very common:

• Sole Traders: net profit
• Directors: salary and dividends or salary and net profit
• LLP equity partner: share of LLP net profit
• Contractors: Day rate x number of days worked a week x 46 weeks

Not all lenders use the same methodologies. For example, some banks and building societies will consider a director's salary and net profit (after corporation tax) rather than salary and dividends. Which could allow you to borrow more. One or two providers are even happy to use pre-tax net profit, or salary, dividends, and retained profit.

A few mortgage providers allow 48 or even 52 weeks of contractor income for mortgage affordability, as long as the employee's fixed or short-term contract doesn't specify fewer weeks.

Visit our documentation checklist guide to learn what paperwork you'll need before applying for a self-employed mortgage.

I have bad credit. Can I still get a mortgage?

Getting a self-employed mortgage with bad credit is entirely possible. Ultimately, banks, building societies and non-mainstream lenders are all concerned with:

• the nature and severity of the adverse credit
• how long ago it occurred
• the value of the adverse credit event
• whether the debt was satisfied or agreement was reached to settle the debt

What forms of poor credit will lenders work with?

Each mortgage provider has it's own tolerance for risk, and will set criteria accordingly. Many  lenders will consider milder forms of bad credit such as a single, low-value, satisfied default, a late payment on a mobile phone bill, or even a satisfied CCJ.

Where it becomes more difficult is with the following types of adverse credit:

• recent, multiple missed or late payments or arrears
• unsatisfied defaults or CCJs in the last year or two
• high value, defaults or CCJs in the past year or two, even if satisfied.
• more severe bad credit like ex-bankruptcy, IVA or a Debt Management Plan (DMP).
• a previous repossession
• missed mortgage payments

Even then, we have access to specialist, adverse-friendly mortgage providers willing to consider each case on its merits. And lenders as a whole have become slightly more flexible over the years with people who have a low credit score.

Is Help to Buy available to me if I'm self-employed?

Yes, if you're a first-time buyer.  The Help To Buy: Equity Loan Scheme does not discriminate between employed or self-employed applicants. We have more information about Help To Buy in our self-employed guide to 5% deposit mortgages.

Getting a self-employed mortgage quote

If you're ready for a mortgage or remortgage quote, or simply need advice, please call us on 0117 205 0655 during our office hours of 9 am-5 pm Monday - Friday.

We scour thousands of mortgage deals to find the most appropriate product for your circumstances. We can also save you wasting precious time, attempting to find a suitable deal by yourself.

Just as important as the mortgage is having adequate mortgage and income protection in place. We have access to both mainstream and specialist insurers to cover nearly every eventuality. So if you'd like a protection quote please get in touch.

Can't talk right now? Enquire online and schedule a call back at a time that suits you.