How Does a Self-Assessment Mortgage Work?

Written by: Sean Horton CeMAP

Obtaining a mortgage can be a bit more complex for anyone under the self-assessment tax system, yet it’s definitely achievable. 

Being self-employed means that lenders might approach your application with more caution. Their concern is often centred around the potential for fluctuating work and income, which could impact your ability to consistently meet mortgage repayments.

However, even with these challenges, as a self-employed person, you have options for securing a mortgage. It may require more effort to demonstrate to the lender that your income is steady and reliable, but there are certainly ways to achieve this.

Am I Self-Employed if I Need an Annual Tax Return?

The requirement to file an annual tax return can indicate self-employment, but this alone does not define your employment status.

Self-employed individuals typically manage their tax affairs through self-assessment, reporting their income and calculating their own tax liabilities to HM Revenue & Customs (HMRC). However, the need for an annual tax return also extends to people with diverse income sources, such as rental income, investments, or substantial savings.

Being self-employed generally means running your business or being a sole trader.

For mortgage purposes, lenders often consider you self-employed if you’re a sole trader, a partner in a business, or own a significant portion of a limited company.

Can you get a mortgage if you are self-employed?

Whether you are self-employed or have a need to submit annual self-assessment returns, there are still plenty of mortgage options.

However, the process might involve additional steps compared to a traditionally employed applicant.

Lenders often perceive self-employed individuals as having a higher risk due to the absence of a regular employer to confirm their income stability.

Keep in mind that each lender has their own set of criteria for self-employed applicants.

In 2014, the lending landscape changed with the introduction of the Mortgage Market Review, which led to more stringent lending regulations.

It increased the responsibility on lenders to ensure that borrowers can afford their loan repayments. This means that borrowers must demonstrate not only the ability to make mortgage repayments but also manage their regular monthly expenses, such as utility bills and other outgoings.

A Guide to Getting a Mortgage When Self Employed

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How Does a Self-Assessment Mortgage Work?

A self-assessment mortgage is tailored for individuals who manage their tax returns themselves, such as self-employed professionals, contractors, and business owners.

In this process, the primary way to verify income is through self-assessment tax returns.

Lenders require documents like the SA302 form or tax year overview from HMRC, reflecting income for the previous two or three years. This information is critical for lenders to assess financial stability and the borrower’s ability to repay the mortgage.

Lenders not only look at past income but also the sustainability of future earnings, often looking at upcoming contracts or business projections. Standard credit checks are performed to determine creditworthiness, and additional documentation such as bank statements or accountant’s certifications are normally requested.

Is It Possible to Obtain a Mortgage with One Year of Self-Employment?

Yes, obtaining a mortgage with just one year of self-employment history is possible, although it often involves seeking out specialist lenders.

These lenders differ from the majority who typically ask for a minimum of two to three years of self-employment records.

It can be beneficial to use a mortgage broker. They can guide you towards lenders who are more likely to consider your application with only one year of self-employment history.

Read this article for a more in depth explanation.

Am I Self-Employed?

Understanding how lenders classify ‘self-employed’ is important. But it’s not as straightforward as it might seem.

Typically, being a sole trader falls under the standard definition of self-employed.

However, you’re also considered self-employed if you’re a partner working on a self-employed basis, or if you have a significant ownership stake — generally around 20% to 25% or more — in a limited company from which you derive your primary income.

Additionally, if you’re a partner in a limited liability partnership, lenders will categorise you as self-employed.

Does Self-Assessment Make It Harder to Get a Mortgage?

If you are under self-assessment for tax purposes it does change the dynamics of applying for a mortgage, but it doesn’t necessarily complicate the process. 

When you’re self-assessed, your SA302 forms or tax year overviews from HMRC become critical in proving your income for the past two or three years.

Lenders rely on these documents to understand your earnings and financial stability comprehensively.

The amount of loan you can secure is influenced by the income you declare through self-assessment. Since business expenses are deducted before declaring your profit, high expenses can reduce the amount of profit shown, potentially affecting the mortgage amount you can borrow.

Some lenders are more familiar with self-assessed applicants and may have adapted their processes to accommodate the unique financial situations of the self-employed. These lenders often offer greater flexibility in their assessments.

How long do you need to be self-employed?

Most lenders prefer at least two years of financial records.

If your financial situation is particularly complex, your application may need to be manually assessed by an underwriter for a more detailed assessment.

The specific requirements vary based on your employment status:

Self-Employed Individuals: Generally, lenders ask for the most recent two or three years of accounts and three months of bank statements. You can either provide your business accounts directly or have them prepared by a qualified accountant. For those who file self-assessment tax returns, lenders will examine the profits and may require further evidence, like upcoming contracts, to gauge future earnings.

Partners in a Business: If you are a partner and your main income comes from this business, lenders will treat you similarly to self-employed individuals, focusing on your share of the net profit for loan calculations.

Directors of Limited Companies: Though not classified as self-employed, directors face similar challenges in proving consistent income. Your income may include a mix of salary and dividends, and lenders typically consider both these components, requiring at least two years of company accounts. Some will also consider retained profits.

Mixed Employment: For those working through a limited company and also undertaking PAYE work, lenders may apply bespoke contractor terms. They might calculate your annual ‘salary’ based on your weekly rate (day rate multiplied by five) for around 46 to 48 weeks. Specialist lenders are available for individuals with a combination of self-employed and PAYE income, particularly beneficial for high-net-worth individuals who may deal with private banks used to handling varied income sources.

The maximum borrowing amount depends on various factors, including the lender’s affordability criteria and your personal outgoings.

Additional Information Lenders May Need

Personal Spending Habits: Lenders will look at your regular expenses, which could include household bills, commuting costs, credit card repayments, and childcare expenses.

Bank Statements: Your bank statements might be closely analysed to assess your spending patterns and financial management.

Credit Checks: Lenders will perform a credit check to evaluate your history with credit and ensure you’ve managed it responsibly.

Internal Credit-Scoring: Lenders use their own automated credit-scoring models, which consider a variety of factors, to make a decision on your mortgage application.

Request Additional References: Sometimes, an accountant’s reference may be required. In the case of a partner in a Limited Liability Partnership (LLP), a letter from the company’s financial directors might also be necessary.

How to improve your situation

  • Improve Your Credit Score: Start by checking your credit score through agencies like Equifax, Experian, or TransUnion at least a year before you plan to buy a house. Ensure your credit report is error-free and take steps to improve your score.
  • Manage Your Spending: Lenders review bank statements to assess your financial management. They need to be confident about your repayment capacity. Consider reducing non-essential expenses.
  • Increase Your Savings: A larger deposit opens up more mortgage options, especially if you have only one year of accounts. This might involve budgeting, cutting back on spending, or job changes.
  • Stay Organised: Having up-to-date and well-organised documentation is key. Complete your latest tax return promptly after the tax year ends to give lenders a recent financial overview.
  • Hire an Accountant: Some lenders prefer applications endorsed by a certified accountant. 
  • Use a Mortgage Broker: Different lenders have varied criteria. An independent mortgage broker like Drake Mortgages can guide you to the best deals and simplify the application process, advising on what you can borrow and how to best present your application.

Chat to an expert

Please call us on 020 8301 7930 to chat with one of our self-employed mortgage experts.

Sean Horton is a co-owner of Drake Mortgages and has worked in financial services, mortgages and insurance since 1988. He regularly writes about mortgages, bridging loans and commercial finance.
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