There are many benefits to owning a business, from the flexibility of working the hours you want to “being your own boss”.
When it comes to finances, however, being self-employed can make things trickier. As well as sorting out your own pension and protection, you’ll also have to consider how to go about proving your income when it comes to borrowing to buy or refinance your home.
The spring is traditionally the busiest time of year for self-employed applicants. The Telegraph report that demand for self-employed loans was the highest ever recorded in the month of January in 2023 and marked a 19% increase compared with the same month in 2022 and a 40% jump compared with January 2021.
The newspaper also claims it has “never been harder” for a self-employed applicant to get a mortgage. While the process is slightly different, there are many lenders out there very happy to lend if you own a business, so read on for some practical tips to getting the home loan you need.
Be prepared to answer a lender’s questions
If you work for yourself, a lender will need to understand the nature of your income and expenses when agreeing a mortgage.
Obviously, they will need proof of your income, typically provided through:
- Two or more years’ certified accounts, ideally prepared by a qualified, chartered accountant
- Both your SA302 forms and tax year overviews (from HMRC) for the past two or three years
- Six months’ business bank statements.
You may also have to explain any increases or falls in your profits over the last few years. Banks and building societies often want to see consistency, so if you’ve had a particularly strong recent year, they may want to be satisfied that these income levels are sustainable.
For example, when determining what they will lend, some institutions will average your profit figures for two or three years – potentially restricting your borrowing potential.
The Telegraph also reports that, in the current climate, lenders are also asking about how your business will afford increased energy and running costs this year, and how your business performed during the pandemic.
Being able to explain dips and rises in profits, and to demonstrate your business is generating sustainable and consistent profits, should help a lender to understand your position.
Find a lender that assesses income in the most beneficial way for you
Different lenders use different methods to determine your income. This is important as it can affect both the size of mortgage a lender will agree, and the interest rate you may be charged.
There are three main ways lenders consider income if you’re self-employed.
1. The income you draw from the business
If you’re a sole trader, your accounts will likely show your revenue and your expenses, and your personal income is what’s left.
If you’re a business owner or company director, your personal income is normally the total amount of salary and dividends that you take out of your company.
2. The potential income you could have drawn from the business
A small number of lenders will consider your income to be:
- Salary and dividends you draw from the business
- Profits you could have drawn but instead retain in the company
- Pension contributions (again, these can be seen as profits you could have taken if you wanted to).
It may seem like a technicality, but a lender also considering your retained profits and pension contributions can make a significant difference to the amount you can borrow. It’s useful if you’re looking to apply for the biggest mortgage possible based on your self-employed income.
3. The value of your contract
If you’re a full-time contractor, some lenders will use the value of your contract when deciding what to lend. You will normally have to provide details of your current and any recent contracts.
The main benefit of using the value of your contract rather than your accounts is that it almost certainly maximises the amount you can borrow. Essentially a lender is considering your “revenue” as your income, not your net profits, or salary and dividends.
Get in touch
Finding a lender who treats your income in the most beneficial way can boost your borrowing potential.
Most mortgage brokers are comfortable with calculating your borrowing potential based on your salary and dividends and will tell you that is the biggest mortgage they can obtain for you.
At the other end of the spectrum, there are some brokers who specialise in working with contractors. While they might be able to find the lending you need, they won’t consider alternative ways of measuring your income and this restricts the choice of lenders available. This means you might not get the best interest rate.
When we meet self-employed clients, we always consider all three ways of measuring income. Only by doing this can we get you both the amount you need to borrow and the most competitive deal available.
To find out how we can help you obtain the self-employed mortgage you need, please get in touch. Email [email protected] or call us on +44 (0) 20 3411 0079.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
