The Honest Truth About Self-Employed Mortgages

We speak to self-employed people every week who've been told by their bank that they can't get a mortgage. Some of them have been self-employed for a decade, earn well above average, and have almost no debt. And they've been turned down.

Here's the thing: the high street banks don't understand self-employment. Their systems are built for people with a P60 and a regular payslip. If you don't fit that box, you often get a flat "no" before anyone's even looked at your actual situation.

That's not how the whole market works.

What lenders actually look at

Most lenders assessment two years of accounts. If you're a sole trader, they'll look at your net profit declared to HMRC. If you trade through a limited company, they typically look at your salary plus dividends — though some will also consider retained profit in the company, which can significantly increase what you can borrow.

The key number they're calculating is your average income over two years. If your income was £40,000 last year and £50,000 this year, most lenders will use £45,000 as the basis for lending. Some will use the most recent year only if it's higher — which is worth knowing if you've had a particularly strong year.

What if I've only been self-employed for one year?

This is harder, but not impossible. There are lenders who will consider applications with just one year of accounts, particularly if you were previously employed in the same industry. The rates may not be as competitive, and you might need a slightly larger deposit, but options exist.

If you're approaching the end of your first year and thinking about buying, it's worth waiting until the accounts are filed before applying. That one set of accounts opens far more doors than applying three months before they're ready.

The accountant issue

A lot of self-employed people — quite reasonably — try to minimise the profit they declare to HMRC to reduce their tax bill. That's perfectly legal and often sensible. But it can create a problem when you then go to a lender and say "I earn £80,000 a year" when your accounts show £35,000.

Lenders lend based on what they can verify. If your accounts show £35,000, that's what they'll use.

This doesn't mean you need to pay more tax. It just means that decisions made three years ago can affect what you can borrow today. It's worth having a conversation with your accountant before you start the mortgage process — not to change anything, but to understand what your declared income actually supports.

The documents you'll need

Getting this together in advance saves a lot of time. For most self-employed applications you'll need:

• Two years of self-assessment tax returns (SA302s) — available from your HMRC account
• Two years of verified accounts (signed by an accountant)
• Three to six months of business bank statements
• Three to six months of personal bank statements
• Proof of ID and address

If you trade through a limited company, you'll also need the company accounts and possibly evidence of ownership.

The credit score myth

Being self-employed does not damage your credit score. There's no "employed" vs "self-employed" scoring category. Your credit history is your credit history — same as anyone else.

Where self-employed people can sometimes run into problems is if they've had irregular income in the past and missed the odd payment. Lenders look at this in the context of your overall profile. One missed payment three years ago is very different from a pattern of missed payments.

Which lenders are worth talking to?

This changes regularly, and it's genuinely where a broker earns their fee. The whole-of-market lenders who are most flexible on self-employed income aren't always the ones running ads on comparison sites. We know who's lending, on what terms, and what they're looking for right now.

If you've been told no, don't assume that's the final answer. Let's have a look at your actual numbers.