How to get a mortgage being self-employed

Corporation Tax Accountant

There are several tax advantages if you are self-employed. However, when it comes to applying for a mortgage, then self-employment can become a disadvantage because of the risks involved. One of the major risks of being self-employed is the fluctuation of your income. Mortgage underwriters see this as a sign of unaffordability. 

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What does it mean to be self-employed?

To be considered as self-employed, you must own 20%-25% or more of a business which acts as your main source of income.

With this in mind, you can be a sole trader, a contractor, or a director of a limited company, as long as you run the business and take responsibility to the failures and success of the business. 

How to get your first mortgage in the UK?

Before providing further information about how to get your first mortgage, it is worth understanding the basic principle of lending. One of the main concerns of borrowing or financing is the risk and returns. In a nutshell, it means the higher the risk you take the higher returns you can expect. The majority of UK banks reverse this theory in order to earn more profit by lowering the risks and expect higher returns from the interests. Therefore, if you are self-employed then the risk is high for the bankers and the underwriters perform extra due deference checks if you are self-employed. The mortgage application rejection rate is higher for self-employed individuals.

Always remember buying a house on mortgage means extra liability although you have acquired the house as an asset. However, it is beneficial to pay your mortgage than to pay your rent. Most of the people in the UK benefitted when the house price goes up. 

  • Can I afford it? Before applying for any mortgage application, it is worth asking yourself ‘can I actually afford it? Can I keep paying the mortgage bill if I do not work for 3-6 months?’. You will lose your house if you do not comply with the mortgage payment. 
  • Get your tax return right: the majority of the UK’s banks and lenders would require minimum 2 years of tax returns. You would also need copies of your SA303 from HMRC. SA302 is the tax over view of your self-assessment tax returns.  You can download them from your personal tax account online. Alternatively you can contact HMRC to send a copy via post. If you have an accountant you can contact him to get further support. 
  • Sort out your credit rating: before submitting your mortgage application, we recommend to check your credit score as it will help you to understand your current situation. Although a lot of mortgage underwriters do say they do not just consider your credit rating as key factor in accepting/rejecting your application.   
  • Understand the lender’s perspective: Almost all mortgage lenders in the UK are regulated and licensed by FCA. The bankers must comply with the FCA regulation
  • Get your accountant’s letter: you can access your payroll data at anytime from anywhere and on any device.
  • Get your mortgage in principle in advance
  • Pay off your default debt: by sharing your accounting and payroll access with your accountants you can collaborate as a team and get more efficient results.
  • Put higher deposit: automatically post your payroll data in your accounting software.
  • Speak to a mortgage advisor: a professional will be able to help you find the best deal to suit your circumstances and provide information on a range of offers from different lenders.
  • Provide the right documents for the application: you will need to provide documents to evidence your income. These can include certified accountants for the past two or more years, SA302 forms, evidence of upcoming contracts, dividend payments or retained profits, or a tax year overview from HMRC for the past two years.

How is a mortgage calculated for the self-employed?

The amount that can be offered, and how it is calculated, is dependent upon the lender themselves. This is why we encourage looking around different lenders to find the best deal.

For a sole trader, the net profits of your business prove your earnings as these belong to you. Ultimately, you will need to show lenders your income for the past two to three years to calculate your average income.

Similarly, if you are a contractor where money is taken from your payslips for tax and national insurance, lenders will analyse your application through the same process as sole traders. With this in mind, you will need payslips for the previous six months.

If you own a limited company, lenders will look at your salary and dividend payments for the past two to three years. Alternatively, if you are part of a business partnership, lenders will only need evidence of your share of profits.

How to increase your chances of getting a mortgage approval?

Given that you are able to supply the necessary information regarding your income, you should qualify for the same mortgage deal as someone with a permanent, full-time job.

The mortgage rate you will be offered is dependent on your credit rating, along with the size of your deposit. The larger the deposit you can put down as a deposit, the better your mortgage rate is likely to be.

However, if you do not get accepted by a mainstream bank, you have the option to apply to specialist lenders with self-employed borrowers, but the rates might be higher.

There are a few steps you can follow to boost your chances of getting accepted for a mortgage if you are self-employed. These include:

  • Have a professional accountant prepare your proof of income.
  • Your business has not suffered a loss in the last two years.
  • You have no missing payments or credit issues. You can check your crediting rate with MoneySuperMarket’s Credit Monitor.
  • Save up for a sizeable deposit.
  • Avoid buying old buildings or flats on commercial property.

What else do lenders take into consideration?

As well looking into the evidence of your income, lenders are also interested in examining your bank statements to see your spending habits, how much you spend on bills, and other costs that show you can afford to repay the mortgage.

The things they also take into consideration to determine whether to approve your mortgage request include:

  • Household bills
  • Travel and commuting costs
  • Childcare
  • Holidays
  • Socialising
  • Hobbies
  • Credit card and store card repayments
  • Loan repayments
  • Car finance agreements
  • Catalogue credit accounts
You will also need to provide your:
  • Passport
  • Driving licence
  • Council tax bill
  • Utility bills from the previous three months
  • Six months worth of bank statements

How we can help

As a professional accounting firm specialising in self-employed accounting, including contractor accounting, sole trader accounting and limited company accounting, Tax Care Accountants know the ins and outs of running self-employed accounts. Speak to one of our accountants today for assistance and/or advice on getting your accounts together in preparation for a mortgage application. 

Call us on +44 (0)1213681277 today or email

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