How do they calculate a mortgage for self-employed? - Simmonds Mortgage Services

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How do they calculate a mortgage for self-employed?

How are self-employed mortgages calculated?
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    One of the questions we regularly get is, ‘How do you get a mortgage if you’re self-employed? Applicants are often unsure how much they can borrow and how to prove their earnings to lenders.

    Self-employed mortgage criteria include providing information about your annual income, business expenses and net profit to help you secure your mortgage.

    What are self-employed mortgages?

    A self-employed mortgage is no different than a traditional mortgage – it can be a fixed rate or variable, and it can be a repayment mortgage or an interest-only mortgage (though these are much more difficult to obtain now).

    The difference with a self-employed mortgage comes with the personal financial information you need to supply. Employees have to provide their last three payslips and bank statements, whereas self-employed applicants must show their company accounts and self-assessment tax returns, tax calculation documents and tax year overviews.

    What counts as being self-employed?

    Self-employed status includes those who are sole traders, in partnerships, freelancers, CIS contractors or limited company directors. However, if you are a contractor on a day rate, you’ll need to apply for a contractor mortgage instead.

    What are the lending criteria for a self-employed mortgage?

    Most lenders will ask for the following information:

    • Proof of identity via passport or driving licence
    • Proof of current address on recent utility bills
    • Bank statements for the previous 3-6 months (to assess your household bills and other expenses)
    • Evidence of deposit money (if not provided by bank statements)
    • Two or more years of certified accounts – ideally, these should be prepared by a qualified accountant
    • Self-assessment tax returns or calculations (SA302) forms or a tax year overview from HMRC for the last two to three years
    • They will also review your credit file to check on any previous loans

    There are some lenders who offer sole trader mortgages to self-employed people who only have one year’s accounts or tax returns, but these tend to be specialist lenders, and the interest rate and arrangement fees may be higher. It also helps if you have a track record in the same industry.

    If you are a limited company, many lenders can lend based on your pre or post-corporation tax profits plus your salary, this may be an average or the latest year. This means you don’t need to pay yourself a high dividend to achieve a high mortgage.

    It’s a good idea to speak to a mortgage broker like Simmonds Mortgage Services if you are in this situation, as they will know the best lenders to approach to get a mortgage.

    How much will mortgage lenders lend to a self-employed person?

    Your maximum mortgage borrowing will depend on your annual income and your usual outgoings to make an affordability assessment for your monthly repayments.

    Mortgage deals for self-employed borrowers should be available at similar rates to employed borrowers, but some mortgage lenders might restrict the income multiples they are willing to lend if they perceive you are a greater risk or if they believe that you have a less reliable income.

    What is taken into account when calculating your LTV?

    Some lenders have a lower LTV for self-employed borrowers. You may only be able to borrow up to 85-90% of the property value.

    This is in contrast to employed borrowers who may be able to find 95% or in a few cases, even 100% deals.

    Should I use a self-employed mortgage calculator?

    Some mortgage brokers and lenders provide a self-employed mortgage calculator on their websites.

    While these can give you an approximate idea of how much you might be able to borrow, they are unlikely to be completely accurate. This is because they don’t take into account your expenses, any other income streams you might have or your creditworthiness to date.

    Speak to a specialist mortgage broker who can identify the lender most likely to be a good fit for your personal circumstances rather than relying on a self-employed mortgage calculator to give you the right figures.

    Looking for a self-employed mortgage specialist? Contact Simmonds today

    Simmonds Mortgage Services is a whole-market mortgage broker with access to a wider range of lenders and deals than the general public can obtain. Call us on 01184 693037 to discuss your situation today.

    Frequently asked questions about self-employment status and mortgages

    Does my employment history impact my mortgage application?

    Most mortgage lenders are happy to lend to those who don’t have employed status as long as they can meet the income requirements.

    Lenders will usually take into account the net profit when calculating the income multiple for the loan, but they may also look at a range of other factors, including:

    – the total income declared by your business over the past 2-3 years
    – the amount of dividend payments received plus the director’s salary paid
    – average profit over a number of years and the retained profits
    – the overall trading history of your business
    – the level of pension contributions you made
    – what upcoming contracts are in place
    – the partnership’s net profit (if you are in a partnership rather than a sole trader)

    What is the ideal loan-to-value ratio for self-employed mortgage applicants?

    As with all mortgages, the higher your deposit, the lower the rate of interest you’ll pay. Try to provide at least a 10-15% deposit so you can get a good mortgage deal with a competitive interest rate. This means your LTV will be around 85-90%.

    Can I get a mortgage with less than a year of self-employed income?

    It’s unlikely you will find a mortgage lender who will be prepared to offer a product if you have less than one year’s figures. Most lenders require 2-3 years, although you can find a specialist lender who will work from just one year’s figures.

    What income multiple can I get on a mortgage?

    The maximum borrowing is likely to be around 4-5 times either net profit if you are a sole trader or potentially salary and dividends if you are limited or pre or post-corporation tax and salary taken.

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    Andrew Simmonds

    Andrew Simmonds is the managing director at Simmonds Mortgage Services. He's been providing mortgage advice to home owners for many years.

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