Self Employed Mortgage Lending

The Evening Standard
Emma Lunn

July 12, 2021

Contrary to popular belief, there’s no ‘special’ category for mortgages aimed at the self-employed. Freelancers, company directors and contractors can apply for the same mortgage products as everyone else.

Where self-employed borrowers often come unstuck is proving their income.

While employed borrowers can simply show lenders their payslips, self-employed borrowers tend to have more irregular and complex incomes, so need a way to prove their earnings.

Before 2014, it was a different world for self-employed borrowers. Back then you could ‘self-certify’ your income; but in reality you barely needed to prove your income at all.

However, so-called ‘self-cert’ mortgages were banned by the Financial Conduct Authority in 2014 Mortgage Market Review and, since then every borrower must prove their income in order to get a home loan.

Essential paperwork
What lenders require from self-employed mortgage applicants varies. Generally, you’ll need to show certified accounts for two or three years – although a handful of lenders will accept one year’s accounts.

You’ll also need to show evidence of your income from HMRC records, either your tax statement or SA302 form.

When determining how much you earn each year, lenders will generally calculate your average earnings from the past two or three years. As with mortgages for employed applicants, most lenders base their mortgage affordability calculations on an applicant’s net profit figure (before tax).

Lenders might ask some self-employed borrowers for additional evidence to show that, as well as making money now, they will continue to do so in the future. For example, if you’re a company director you might need to show proof of dividend payments or retained profits. If you’re a contractor, you might need evidence of upcoming contracts.

How affordability works
Once you’ve proved your income, the mortgage affordability assessment for a self-employed applicant is the same as any other mortgage. The lender will look at your income and outgoings to assess if you can afford the amount you want to borrow.

The assessment will look at your bank statements to see what you spend your money on, so it’s a good idea to avoid frivolous spending in the six months leading up to your application.

And you should completely avoid spending that might appear as a ‘red flag’ to a lender, such as online gambling or payday loans.

As with any other mortgage, the bigger the deposit you have, the better your chances of acceptance and the lower the interest rate you’ll be offered.

Getting accepted post-pandemic
Unfortunately, Covid-19 has made it more difficult for self-employed borrowers to be accepted for a mortgage.

Some banks, such as NatWest, are not offering mortgages to self-employed people who received money from the Self Employment Income Support Scheme. This is the case, even if their income was steady before the pandemic and their business is viable post-pandemic.

HSBC says borrowers who have taken grants can be accepted, but none of the grant income can be used to support the mortgage application. This means self-employed borrowers who used grants to replace their income during lockdown are in danger of failing the bank’s affordability checks.

Another issue is that lenders usually use earnings from the past two (or three) years to assess affordability. Self-employed workers impacted by the pandemic are likely to have earned less than usual in the tax year 2020-21. So, this dip in income could affect their mortgage applications until 2023.

Crucial changes
However, a couple of lenders have changed their lending criteria to account for the pandemic.

Santander’s lending policy now discounts the 2020/21 set of accounts for self-employed borrowers who have suffered an out of ordinary loss of earnings. So, affordability will be based on how much you earned in 2019-20 and 2018-19.

Meanwhile, HSBC asks for business bank statements from January, February or March 2020 and the last 60 days’ to provide a view of pre-pandemic and current trading conditions.

Other lenders, such as Nationwide, refer the majority of self-employed cases to an underwriter who decides on a case-by-case basis what documentation is required to support the application.

Consider a mortgage broker
Lenders’ criteria change all the time, so a good mortgage broker can be worth their weight in gold.

Brokers will be up-to-date in terms of the lending criteria of different providers, as well as having knowledge of and access to smaller lenders happy to lend to self-employed applicants.

A broker will also know the best lenders to approach depending on whether you operate as a sole trader, partnership, or limited company. They should also be clued-up about which lenders offer the cheapest interest rates to the self-employed.

Boost your chances
Mortgage lenders are generally keen for self-employed applicants to provide accounts prepared by a qualified, chartered accountant. So, it can be worth hiring a professional to do your books and tax return.

With any mortgage application, the bigger your deposit, the more options you will have. The lower your loan-to-value (LTV), the keener lenders will be to accept your application.

The LTV is the ratio of your mortgage borrowing compared with the purchase price of the property. LTVs can reach 95%. But the lower the figure, the better the mortgage rate and the cheaper the repayments ought to become for the borrower.

Would-be borrowers can also help their chances with a good credit score. Being on the electoral roll, having a history of paying bills and debts on time, and not taking out too many forms of credit, each contributes to a successful mortgage application.