How much can you borrow on a self-employed mortgage?

Borrowing the amount you need to buy a property when you’re self-employed can be frustrating if you don’t know which lenders to go to. 

When you have help from a mortgage broker, getting a self-employed mortgage is a much easier process because you’ll know how lenders calculate the maximum amount you can borrow, which ones to avoid and how to improve the likelihood that you’ll get approved.

Is eligibility criteria strict for self-employed borrowers?

Mortgage lenders in general have strict affordability criteria that they’ll require any borrower to meet in order to qualify for their products. A bank or lender can’t just approve a large loan for everyone and they’ll ask that any applicant proves they have good affordability for the mortgage amount they’re applying for. 

Usually lenders will want to look at the following to assess a person’s ability to meet their eligibility criteria:

• Credit history

• Proof of ID and address

• Proof of income (SA302 forms if you’re self-employed, preferably signed off by a chartered accountant)

• Proof of deposit 

How does a self-employed person prove they can afford a mortgage?

When you’re self-employed, proving that you earn enough regularly can be the tricky part, depending on the nature of the work and how often your income fluctuates. 

An employed borrower might be able to get a loan up to 5.5 x their annual salary, depending on their other circumstances but a self-employed borrower might struggle to find a lender that’ll approve a loan that large. 

Being self-employed is usually deemed as a greater risk where income is concerned. If, for example, a roofer works less during the winter months, their income might not be enough to cover their mortgage or unexpected costs like property maintenance. That could leave the lender at a loss.

Not all lenders take a one size fits all approach when it comes to this though as some specialise in mortgages for self-employed borrowers like company directors, contractors and freelancers. They know that the nature of this type of employment can be irregular, with periods of high income and periods of lower income. 

While that does increase the risk of non-repayment for them, some have criteria that allows them to assess income differently, allowing borrowers to apply for higher loans when affordable.

For example, there are lenders that look at:

• The latest year’s profits

• Profits from a limited company plus dividends

• Or the average earning over a period of 2-3 years

How are different self-employed workers assessed on their income for a mortgage?

Sole traders

Usually, though certainly not always, mortgage lenders will take into account the average profit from the last 2-3 years. They’ll do this by checking the accounts (SA302 form disclosed to HMRC). They’ll take the average profit and then multiply it between 4 and 6.5, depending on their income rules and the type of sole trader. 

For example, a self-employed dentist or doctor might meet criteria for a higher income multiple based on how much they earn whereas a self-employed hairdresser or admin assistant might expect to meet the criteria for 4.5 x their annual net profit. 

Contractors

Some banks and lenders require 3 years of accounts to prove stability of income when it comes to contractors like builders, plumbers, electricians, social media managers and graphic designers. They like to see a regular income that can be depended on as well as evidence of ongoing and future contracts for work. 

That doesn’t mean that it’s impossible to get approved for a mortgage if you’ve got less than 3 years of accounts though. There are fewer lenders to choose from if you have say 1 or 2 years of accounts but they do exist and with the help of a broker, you could be eligible to apply to one. 

Limited company directors

The longer your trading history, the better but again, don’t let that put you off. There are lenders that will consider limited company directors with 1 years of accounts, especially those with a steady stream of income. 

Usually, banks look at the annual salary plus dividends which can be helpful if you’ve paid yourself a small income for tax purposes. There are also lenders that may take pension contributions before tax into consideration too and a small group of lenders will also calculate the maximum borrowing amount by including a share of retained profits. 

How can I maximise the amount I can borrow for a self-employed mortgage?

If you’re unsure about which method of income calculation would work best for your situation, you might want to consider asking a broker that specialises in mortgages for self-employed people to look at your income, check your eligibility and recommend a list of suitable options. 

Doing that could save you time and the frustration of comparing lenders online and over the phone. 

We’ve helped hundreds of people find a mortgage after they’ve tried to look for themselves. One of the most common issues we come across is a self-employed borrower applying to an irrelevant lender that can’t approve the mortgage amount they need. A quick chat with us usually resolves this.

Improving the odds of borrowing more 

When your appeal as a borrower is better, more lenders will be open to accepting you as a customer. There are some simple things you can do to improve your affordability and meet the criteria of a wider range of banks and lenders, like:

• Save a larger deposit - the higher your deposit, the lower your loan-to-value ratio. Having a higher deposit makes you look more committed to the mortgage because you have a larger upfront stake in the property value. 

• Offer assets as security for the loan - a handful of lenders will consider the value of assets such as property, luxury cars or jewellery to offset the risk of a larger loan.

• Improve your credit reports - not just one but on all of the websites that display credit history because each one might have a different record of your accounts, debts and credit score. If there are any outstanding payments, arrange to pay them off or if affordable, clear them. Make sure your address and details are correct and appeal any outdated information about debts with the original creditors.

• Ask a relative that’s a homeowner to offset your mortgage - They could use the value of their home as security for your mortgage, allowing you to borrow more.

• Improve your money management - Stay away from gambling websites like The National Lottery, PaddyPower and 21Casino. Even the odd flutter makes you look like a risky and impulsive spender and mortgage lenders won’t like it. Avoid payday loans and maximising your overdraft like the plague too. 

Should I reduce my business expenses so I can borrow more?

We get asked this all the time. You’ll naturally have lots of business expenses as a self-employed worker, whether that be the cost of a laptop, tools, clothing or taking clients out for coffee to discuss upcoming projects. 

Usually, you’ll want to include these costs as part of your expenses on your tax returns but doing this reduces your total profit. While this will reduce the amount of tax you pay, your profit is what most lenders will look at to calculate your maximum mortgage amount. Less profit = less mortgage loan and that could cause you issues when it comes to buying the property you want. 

Speak with an independent financial advisor about this, as well as a mortgage broker. Between them, they can guide you on getting the right balance between offsetting your business expenses against profit and getting the amount of mortgage you need. 

Self-employed mortgage advice 

Approaching your mortgage search alone isn’t the most effective way to find the best deal or borrow as much as you need. Without advice on who to approach, you could end up applying to a lender with criteria you don’t meet and that results in a rejection all too often. 

Avoid the headache and apply to the right lender the first time to minimise the amount of application fees you pay because that money could be better spent towards boosting your deposit or buying yourself a nice comfy sofa to relax on once you’ve bought your new home.