Self-Employed 1 Year Accounts Mortgage
Chris Needham talks us through the process of getting a mortgage if you are self-employed with one year’s accounts.
What are the requirements to get a mortgage as a self-employed individual with only one year’s accounts?
Whilst most lenders would want you to have been trading for three years as self-employed, some may accept an application with just one year’s trading accounts.
If you’ve just got one year of accounts, it does help to show the lender that you have experience in a similar job or industry before you went self-employed. So whilst you’re new to self-employment, you might be well established in the industry. That is really important to lenders and helps enhance your chances.
What is acceptable proof of income for a self-employed mortgage applicant with one year of accounts?
With only one year’s accounts it’s harder to prove the stability and sustainability of your income.
Lenders usually look at the last three years of trading and average your income over that time. Some lenders look at the lowest annual income of the three years, some might look at the latest year – they all do it differently.
But what they’re effectively doing is using that track record to get a feel for the stability of the business. Over a period of three years any fluctuations are smoothed out – while if we’re only working off one year, the lender may be more cautious.
If you’re a sole trader, lenders would request HMRC tax documents. They’d be looking for a full year’s tax calculation and the corresponding tax year overview – that would show the net profit for that year’s trading.
If you’re a limited company director, lenders would either want that full year’s accounts from a suitably qualified accountant, or the tax calculation and tax year overview.
For a sole trader, lenders are looking at the net profit. When it’s a limited company, most lenders are looking at the salary you’ve taken and the corresponding dividends as your income, to work out how much they’ll lend you.
Sometimes the lender asks for an accountant certificate to get a bit more information, detailing turnover, profits and future plans for the business. That way the lender can get a feel for what the future looks like.
Do self-employed individuals with one year’s accounts have access to the same mortgage products as those with longer accounts?
Yes, in theory. It’s just that fewer lenders offer mortgages to clients that have only been self-employed for a year. With less lenders willing to lend, you have access to fewer mortgages. By default, it then may mean that you’re paying a slightly higher rate of interest because you don’t have access to the full range of lenders.
What steps can I take as a self-employed individual to increase my chances of securing a mortgage with one year’s accounts?
It’s all about planning – which I think I say on every episode. Get those HMRC documents in good time. All lenders would then be looking for probably three or six months of business bank statements, to look at the account conduct, the money coming in and how much is going out.
That just gives further evidence that the business is trading well. If an accountant’s report is requested, that details how the business has performed so far and what the plans are for the future. That’s all good information to help us work with the lender and make sure we’re successful in any application.
It’s basically having all of the documents readily available. We can look through them, understand how the lender will assess the income and then find the most suitable lender for you.
Speak To an Expert
How do lenders assess the affordability of a mortgage for self-employed individuals with one year’s accounts?
It’s exactly the same way as for someone who is employed. The lender is looking at how much you get paid in a year, to work out how much they think you can afford to borrow.
Nearly every lender across the market now has a different calculation and looks at commitments in a different way. Every lender will probably lend a different amount, so it is a lot more complicated than it used to be.
But realistically, if someone earns £40,000 net profit as a sole trader, they would be able to borrow the same as someone that earned £40,000 through being employed.
What interest rates can I expect as a self-employed mortgage applicant with one year of accounts?
It’s about the availability of schemes. Because only a handful of lenders would lend with only one year’s trading, you’ve not got access to the full range of schemes available.
It may mean that you’re paying a slightly higher rate just because of that availability. Interest rates are always influenced by standard things – how much deposit you have and the property you’re looking to purchase or remortgage. The individual scheme you want plays a role too – whether that’s a fixed rate or a tracker rate.
So being self employed for a year doesn’t directly influence the rate, it’s that fewer lenders offer schemes to this kind of client.
How long does the mortgage application process usually take for self-employed individuals with one year of accounts?
During Covid it was quite different, but now, if we submit an application for someone that’s employed and someone that’s self-employed, as long as we’ve got the supporting documents, the underwriting processes are almost the same length.
With one year’s self-employment, there can be a little bit more underwriting to do for the lender to make sure that the income and the business is stable. But the timings are not much different – there’s nothing to worry about there.
Is it beneficial to work with a mortgage advisor or broker when applying for a mortgage as a self-employed individual with one year of accounts?
Definitely. Because we’re doing mortgages every day of every month, we get to know which lenders accept self-employed applicants with a year’s accounts. We definitely know which lenders won’t.
We now know what documents each lender would expect to support that application and that’s where our experience really comes in. So, yes, definitely use a mortgage broker.
Can I apply for a joint mortgage with a partner who has a regular income, if I’m self-employed with one year of accounts?
Yes, absolutely. When a lender is assessing any mortgage application, they are looking at the risk in that application. So if one of you is employed and the other is self-employed, that may enhance the application. There’s a mix of incomes. It’s not all reliant on someone that is newly self-employed.
A joint application with someone that’s employed on a permanent contract would mitigate the risk of the other person that’s just become self-employed. That’s always possible, and always helps.
Can I use additional income sources, such as rental income from properties or dividends for a mortgage as a self-employed individual with one year of accounts?
Yes, that’s certainly true. If you are a sole trader with some net profit from your first year of trading, some lenders would then take other income to support that.
It may be that you have a couple of Buy to Let properties that generate income. Some lenders may use that income to support the application and enhance the affordability.
Some will only use that rental income if the property is unencumbered – so it doesn’t have a mortgage on it. Other lenders may take the rental income with a mortgage on that property.
Again, it’s another good reason to use a mortgage advisor. Every lender is different.
Is it possible to make overpayments or pay off a mortgage earlier as a self-employed individual with one year of accounts?
Yes. Being self-employed for a year really doesn’t impact the nature of the mortgage that you end up with. With most mortgages now it is possible to make overpayments of up to 10% the amount you borrowed, or the balance, each year without any penalties.
Again, every lender’s different. With some it’s 10% of the amount you borrowers, others it’s on the balance at the start of each year. But it’s always possible to make overpayments of up to that 10% without penalties. That doesn’t matter whether you’re employed, a sole trader or a limited company director.
In terms of paying off the mortgage, again it depends on the particular scheme. With the majority of fixed rate products, if you paid off more than the 10% in that period then there would be a large penalty.
With some of the tracker products you can make more than a 10% overpayment without penalty. So again, speak to a mortgage advisor. If that’s something that you’re looking to do in the short or medium term, we would make sure that we factored that into our research to choose the most suitable product for your needs.
Your home may be repossessed if you do not keep up repayments on your mortgage.