The most common surprise in a self-employed mortgage conversation is the income figure. A business turning over £150,000 does not give you an income of £150,000 in a lender's eyes. Very often the figure they use is less than half what the client expected.
This is not lenders being awkward. Each business structure produces a different verifiable number, and lenders have settled on which one they trust. Knowing which number applies to you before you apply changes the whole conversation.
If you would rather talk it through than read it, see how we handle self-employed mortgage cases.
If you are a sole trader
Lenders use your net profit. That is the figure left after allowable business expenses and before tax. Not turnover.
So a sole trader with £120,000 of turnover and £70,000 of expenses has an income of £50,000 for mortgage purposes. The £120,000 is not relevant to the calculation, however hard it was to earn.
Evidence is usually your SA302 tax calculation and the matching tax year overview from HMRC, typically for the last two years. Some lenders will take a certificate from a qualified accountant instead.
If you are in a partnership
Your share of the net profit, as set out in the partnership agreement and declared on your own tax return. The partnership's total profit is not your income. Your share of it is.
If you are a limited company director
This is where lenders differ most, and where the choice of lender does the most work.
Most lenders take your salary plus the dividends you have actually drawn. That is the standard approach and it is what a high street application will usually assume.
A smaller number of lenders will take your salary plus your share of the company's net profit after corporation tax, whether or not you drew it. If you leave profit in the business, which most sensible directors do, the difference is substantial.
Take a director on a £12,570 salary, £25,000 of dividends, and £60,000 of profit retained in the company. On the first approach the assessable income is around £37,570. On the second it could be closer to £97,000. Same business, same year, same person, and a completely different borrowing figure.
Lenders that use retained profit are a minority and their criteria vary on how much they will count, how many years they want and what the accountant must confirm. Availability depends on the lender and your circumstances.
Which years they use
Most lenders want two years of trading history. Some will consider one year if the rest of the application is strong. Three years opens more doors than two.
What they do with those years also varies:
- Many average the most recent two years.
- Some use the latest year only.
- Some use the lower of the latest year or the two-year average.
The direction of travel matters. If your income is rising, an averaging lender holds you back and a latest-year lender helps you. If it has fallen, most lenders will work from the lower figure and will want to understand why.
The tax efficiency trap
A good accountant reduces your taxable profit. A mortgage lender reads that reduced profit as your income. The two objectives pull in opposite directions and nobody usually points this out until it is too late.
Two or three years of aggressive expense claims immediately before a purchase can cost you more in borrowing capacity than they saved you in tax. That is not an argument for paying more tax than you owe. It is an argument for having the conversation early.
If a purchase is anywhere on the horizon in the next two or three years, your accountant and your broker should be told at the same time.
What you will need
- Two years of SA302 tax calculations and tax year overviews, or an accountant's certificate
- Two years of full business accounts if you trade through a limited company
- Three months of personal bank statements, and often business statements too
- Proof of your deposit and where it came from
- Details of any business or personal borrowing, including director's loan accounts
Where this leaves you
Being self-employed is not a barrier to a mortgage. Being unprepared is.
Criteria vary more in this part of the market than almost anywhere else, and that cuts both ways. A decline from one lender tells you very little about what the rest would do, provided the next application goes somewhere that actually fits your structure.
The next question is usually how much all of this adds up to. We cover that in how much you can borrow when you are self-employed.