Self-Employed One Year Accounts Mortgage
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Self-Employed One Year Accounts Mortgage
Adam Messer answers the most frequently asked questions about self employed mortgages for people with only one year’s accounts.
What are the requirements to get a mortgage as a self-employed individual with one year’s accounts?
If you’ve been trading for just one year there are a couple of lenders we can go to. The main requirement is that you need to be self-employed in a field that you worked in before.
So if you’re an employed electrician, for example, and then you go self-employed as an electrician, that’s fine. But if you are an employed mortgage advisor and you decide to become a self-employed electrician, plus you just have one year’s accounts, that’s less appealing to a lender.
You haven’t got a track record of knowing what you’re doing. You probably can’t just decide to do something totally different for a year and expect to get a mortgage.
If you have a really good first year there may be a specialist lender we can go to, but really you need to be going from employed to self-employed in an area where you’re experienced. That’s the key for getting a mortgage with just one year’s figures.
What is acceptable proof of income for self-employed mortgage applicants with one year’s accounts?
If you’re a sole trader we’re going to need your first year’s SA302s or tax calculations. Your accountant will normally be able to generate those for us – it’s just a summary from HMRC showing how much you’ve earned and how much tax is payable. The net profit figure is the important one.
Alongside that, we get a tax overview, which is again an HMRC document that shows you’ve paid the tax for that year. It might not be due yet, and that’s fine.
If you’re a limited company director we’ll ask for your first year’s accounts alongside those HMRC documents. Even if you’ve been going more than a year, we need those same documents. We’ll just need more of them.
Do self-employed individuals with one year’s accounts have access to the same mortgage products as those with longer accounts?
Yes, they are the same products, but there are fewer lenders. Only a couple of lenders take people with one year’s accounts. But the products are the same, whether you’ve got one year’s or 10 years’ figures.
How can I increase my chances of securing a mortgage with one year’s accounts?
I suppose it’s quite common in your first year not to make much profit, because generally you’ll write off your expenses like buying equipment set up costs. The more expenses you have, the less profit you’ll show.
When you’re self-employed, it’s all about your profit. People often think that they’ve earned say £50,000 when £50,000 has come into the business – but that’s your turnover. You’ve then spent £30,000 on materials and setup costs, so your net profit is only £20,000. That’s the figure that the lender is going to use.
It’s a difficult balancing act and you have to be accurate on your accounts. The lower your net profit is, the less you can borrow.
How do lenders assess the affordability of a mortgage for self-employed individuals with one year’s accounts?
It’s much the same as assessing every other mortgage. It’s about looking at your income and your outgoings. It’s important to factor in any other kind of debts – loans, credit cards etc.
The lender is going to use that to calculate what they’ll lend to you.
Normally you can borrow around four and a half times your income, but the more debts and costs you have in the background, the less that’s going to be.
Only a small pool of lenders will help us with one year’s accounts. If it’s cost you a fortune to set up the business and you’ve only shown a little bit of profit, plus you’ve got credit card and car finance in the background, we might struggle to get you a mortgage. We might need that second year of accounts to show an increase in profit.
But if you’ve got a year’s accounts, it didn’t cost you much to get set up, and you just have normal expenditure, you’re going to be in as good a position as anyone else.
Are self certification mortgages available for self-employed individuals with one year’s accounts?
No, that’s very much a thing of the past. It’s one of the reasons why the banks got in such a mess in 2008. You can’t self cert anymore. Everything has to be demonstrated – we have to have proof of income and lenders will only lend what they think you can afford to borrow based on your income and your outgoings.
What interest rates can I expect as a self-employed mortgage applicant with one year’s accounts?
The same as everyone else. Again, from that narrower pool of lenders you’ll still get the same rates as other applicants. You don’t have to qualify for specific rates.
If a lender agrees to lend you some money, based on the deposit you’ve got or how much equity you’ve got, then they will give you a set rate no matter what your situation. You’ll get the same rate as anyone.
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Are there any specific lenders that specialise in mortgages to self-employed individuals with one year’s accounts?
Yes, there are a couple of high street lenders and a few middle ground, slightly more specialist lenders. The more specialist you get, generally the higher the rate gets. If we can keep it on the high street, that’s always good.
What documents do I need to gather as a self-employed individual applying for a mortgage with one year’s accounts?
First is the tax calculation, which normally runs from April to April, and your tax overview. That’s going to show the tax you owe or have paid depending on the point in the year.
If you have a limited company, some lenders just want the same documents, which will state your salary and dividends. It’d be useful to have the first year accounts as well, because we might go to a lender that looks at accounts instead of tax figures. It can be slightly more complex depending on your situation.
The best thing to do is speak to a broker – we’ll know which lenders we’re going to go to and which documents are needed.
What other criteria or considerations should self-employed individuals with one year’s worth of accounts be aware of?
It’s the same deal whether you have one year or 10 years – it doesn’t really matter. It’s just really that there is a smaller pool of lenders to focus on and that history as I said at the start – if you move to self-employment in the same field, it puts you in a much better position than if you’re changing careers.
How long does the mortgage application process usually take for self-employed individuals with one year’s accounts?
No longer than anyone else – we’re not jumping through extra hoops. I’d normally allow two to three weeks to get your mortgage application agreed from start to finish. Lenders often have questions along the way and we have to allow for their processing times.
We submit an application, then it takes a few days for them to look at it. They might ask a question, then take time to look at the answer, then they’ll do a valuation and that’ll take a few days to come back. It can be a good couple of weeks.
Sometimes it’s all system driven – I think our record is about three minutes if it’s all automated. But that’s rare, it’s normally a week or two.
Is it beneficial to work with a mortgage advisor or broker when applying for a mortgage as a self-employed individual with one year’s accounts?
Yes, absolutely. You can use a comparison site but it won’t tell you which lenders are going to consider your income. There’ll be some information on Google but people won’t explain which lenders to go – that’s what we’re here for.
Lenders change from time to time as well. They change their criteria to suit what sort of business they want and how busy they are. A good mortgage broker is always going to know which lenders to approach and which to avoid in any situation.
Can I apply for a joint mortgage with a partner who has a regular income even if I am self-employed with one year’s accounts?
Absolutely. If we need to use your income we would need to go to the same pool of lenders. Those lenders will also use your partner’s income to calculate how much you can borrow.
Are there any specific challenges or risks that self-employed individuals face when applying for a mortgage with one year’s accounts?
The volatility of being self-employed is always a risk. But then that’s why you want to be self-employed – it’s the same for anyone that runs their own business. Things go up and down. You can have good years and bad years.
If you have a couple of good years then you can borrow more. If you have a couple of bad years then you can borrow less. If you take your mortgage based on your first good year but then it dips down a bit, remortgaging might be tricky.
The same is true vice versa – if you take a mortgage in the early part of your business and then a few years later you’ve got some good figures behind you, perhaps you can upsize because you can borrow more.
But there are no particular risks associated with one year’s accounts over anyone else. From the lender’s point of view it’s about making sure your income is consistent and you’re always going to be able to pay the mortgage.
The last thing they want to do is repossess your property because it costs them money – they don’t want to do that. So they need to have checks in place so that’s never going to be an issue. That’s why a lot of lenders want more track history.
What happens if my one year accounts show low or fluctuating income? Can I still qualify for a mortgage?
You can still qualify, but it might not be a very big mortgage. If your first year is low then that’s the figure used to assess how much you can afford to borrow.
Let’s go back to that electrician as an example. They might have been employed on £40,000 a year, then gone self-employed. It’s taken a little while to get set up and find customers, so the first year’s net profit is £20,000. That’s what we’re basing lending on, even though you are used to earning more when employed.
It’s the same for everyone that runs their own business. We have good years and bad years and if the most recent year is low, that’s going to affect your affordability.
What impact does credit history have on the mortgage application process for self-employed individuals with one year’s accounts?
Credit score will have quite a big impact. It’s all about risk for the lender. If you’ve only got one year’s accounts, the lender is going to want you to tick a lot of other boxes.
They’re going to want quite clean credit history. Credit problems make it harder for the lender to confirm you will be a good customer. If you’ve got missed and late payments and one year self-employed, we’re going to struggle to get that mortgage lender to take a chance on us. So credit history is quite a big factor.
Are there any government schemes or support available to assist self-employed individuals with one year’s accounts in getting a mortgage?
Not that I can think of. Government schemes tend to be for First Time Buyers. There is the Lifetime ISA which is available to you just the same as anyone else, but there’s no government scheme specifically for the self-employed.
Are there any alternatives to traditional mortgages that may be more suitable for self-employed individuals with one year’s accounts?
No, not really. The kind of mortgage lenders we would go to are fairly mainstream in their approach. There’s not much innovation in the industry for specialist schemes. A mortgage works in the same way for everyone, really.
It does depend how much you want to borrow and how much equity or deposit you’ve got. Some people like to take a mortgage on interest only, where you just cover the interest on the loan each month.
Actually repaying the loan can work well for self employed people who have good years and bad years. In the good years you overpay your mortgage, in the bad years you just cover the interest.
As far as specialist schemes and help go, you’re just in the mix with everyone else.
Can I use additional sources of income such as rental income from properties or dividends?
Most lenders would take pretty much all income into account. Rental income is a funny one where different lenders do different things. Some lenders will look at the rental income and the mortgage on that property and they’ll take the difference into account for your affordability. But lenders that do that might not be the same ones that take one year’s self employed – so we have to join these two bits of criteria together.
Some lenders will use rental income if it’s on your tax return – that normally factors in the mortgage and other costs to run the property. If a profit shows on your tax return then the lender may be more inclined to use it. Again, it’s about pairing that with one year’s self-employed criteria.
Any other income you’ve got such as benefits and maintenance and other income from a partner can be included as well.
Is it possible to make overpayments or pay off a mortgage earlier as a self-employed individual with one year’s accounts?
Absolutely. Whether you are self-employed with one year’s accounts or 10 years’ accounts, it doesn’t matter. Every lender will let you overpay to a certain extent. It’s normally up to 10% of the balance per year.
So if you owe £200,000, you could overpay by up to £20,000 that year – it’s a reasonable chunk. If you go over that 10% normally you would get a penalty, depending how long you’re tied in for and who the lender is. Penalties can be around 1% to 5%. You can overpay with most lenders.
What else do we need to consider with a mortgage when self employed with one year’s accounts?
In summary, really, you can get a mortgage if you’ve got one year’s accounts. If you want to find out what’s applicable in your situation, just book an appointment with us.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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