A guide to getting a self-employed mortgage with one year’s accounts

If you’re recently self-employed, it might feel like the mortgage industry is rigged against you. High street lenders, by default, ask for two to three years of work history and trading accounts. Either that, or that they simply can’t help.

This type of instant (and often unjustified) rejection can feel unfair. You’re making good money. You’re paying your bills in full and on time. So why does the computer default to saying “no”? It’s bordering on prejudice, right?

The truth is: You CAN get a mortgage with just one year’s accounts. You just need to stop looking at traditional lenders and their out-of-date, biased affordability calculations. Instead, start looking for flexible lending criteria. That journey starts here.

1. Can I really get a mortgage with only one year of accounts?

Absolutely, yes! There are lenders and building societies with flexible and specialist criteria willing to manually underwrite mortgage applications with just a year’s worth of trading accounts.

However, it’s harder to get approved than it would be for someone who’d been in a PAYE, employed role for the same amount of time.

• “High Street” prejudice: most mainstream lenders (e.g. Barclays, Santander, or Nationwide) usually demand a minimum of three years‘ trading history, and the accounts to back up that experience. They tend to view anything less as “risky.”
• vs Specialist Lenders: We work with a network of lenders that don’t have traditional, customer-facing outlets. The mortgages they offer are designed specifically for business owners, freelancers, and contractors. They are happy to consider applicants with just one year’s trading history (and sometimes even as little as 9 months).

The problem newly self-employed workers have is accessing these specialists. To some extent, this isn’t a coincidence. Many specialist and ‘intermediary only’ lenders insist that applicants approach them through specialist brokers.

The responsibility for proving mortgage affordability on the basis of one year’s accounts therefore falls to the broker. Our brokers are in constant contact with our network of 30+ lenders who are self-employed-friendly.

Many of these lenders use manual underwriting, thereby approving applications on merit. They don’t rely on traditional lenders’ algorithms, which would otherwise reject a newly self-employed person’s application. Instead, they use common sense, provided we can make a solid case for the applicant.

2. Why do lenders make it so difficult?

Mortgage lenders love certainty. As a PAYE employee, your payslip looks roughly the same every month. Your income is thus easy to predict.

When you are self-employed, your income might fluctuate. If you’re trading in a volatile industry, your net profit may also be affected. To a nervous lender, a business that is only one year old has yet to prove itself.

Because of their overarching lending criteria, their underwriters have to consider the question: What if their business fails next year?

It is a negative outlook. But all lenders have one eye on the FCA’s Responsible Lending Guidelines. To ensure you don’t get caught hovering above this potential trapdoor, you simply have to provide the right evidence. That’s where a specialist broker is your new best friend.

3. Paperwork: what specific ‘evidence’ do I need to provide?

Unlike PAYE employees, you can’t simply present your bank statements to underwriters to prove your income. You need to provide official tax documents to back up your personal and business bank statements.

If you’ve finished your first full financial year, here’s what you need to gather:

• Finalised Accounts: These represent your business by numbers. Most lenders will only accept final accounts signed off by a qualified accountant. And, yes: lenders trust accountants more than they trust numbers you prepared yourself
• SA302 (Tax Calculation): This specific form from HMRC summarises your officially-declared income
• Tax Year Overview: Yet another HMRC document that lenders ask for. It proves you have paid the tax due on your income, cementing their opinion of your mortgage affordability

You can download your SA302 and Tax Year Overview directly from your HMRC online account. Alternatively, ask your accountant to send them to you.

4. Working out mortgage affordability based on your payment structure

This is the most confusing part for self-employed homeowners, especially those who are also first-time buyers. A big part of this confusion stems from the mixed messages borrowers can get from the same lender. Let me explain.

Every lender has its own unique lending criteria: the factors that define your “income” for affordability purposes. The problem is, most lenders use specialist underwriting teams for more complex mortgage applications. And, as a self-employed applicant with only a year’s accounts, you do fall into that ‘more specialist complex’ bracket.

You can’t access those specialist underwriters via a call centre or in-branch. Many only deal with the public through an intermediary (broker), like us. That’s because we’re specialists too and can vet applications before they reach the specialist underwriters. This helps them see an applicant’s affordability more clearly, which is key to them making an accurate assessment.

Mortgage affordability by job description

As I said, all lenders have their own take on what they class as risk. The way you describe how you work can also affect that perception. But there is a general pattern that most lenders follow.

For a start, if you’ve only been self-employed in your role for one year, they’ll expect you to have experience in that industry as an employee. They’ll also want to ensure your industry is viable. Satisfying these criteria will lower the level of risk they attribute to you.

Beyond that, here’s a brief and generalised summary of how underwriters perceive the different types of self-employed payment structures:

If you are a Sole Trader

Specialist lenders look at sole traders’ and freelancers’ net profit, not just what the applicant has declared on their SA302. That’s because they know that SA302s and Tax Year Overviews only tell part of a sole trader’s story.

For underwriters, net profit is your total turnover minus your business expenses. So here’s a quick heads up. If you use a whole range of expenses to lower your tax bill, your profit will appear lower. This could reduce the amount a lender is willing to lend you for a mortgage.

Further reading: Sole trader mortgages

If you are a Limited Company Director

Traditional lenders usually look at Ltd Co. directors’ salary + dividends to gauge their mortgage affordability. Salary + dividends rarely offer a clear insight into what a director can afford.

That’s because most directors pay themselves a tiny salary (for tax efficiency) and take the rest as dividends. But there is a better way.

Specialist lenders will manually underwrite your mortgage application. They can then incorporate your Share of Net Profit into their affordability calculations. This often allows you to borrow much more than looking at salary + dividends alone.

Further reading: Mortgages for company directors

If you are a Contractor

Okay; how do you define a contractor? The term has come to cover so many ways of working in recent years.

For the purposes of this guide, we’re going to assume you’re a day-rate contractor on a fixed 3-, 6-, or 12-month contract. There are links to guides to this and other types of contracting directly after this brief overview of day-rate contracting:

Lenders will use your gross day rate as the basis of their affordability calculation. This method is called ‘contract-based underwriting’. But, before your day rate can form a salary equivalent, they have to annualise it. This is how they do that:

• Ask for a copy of your contract, showing the term, hours worked and the remuneration (day rate)
• They then extend that day rate using this calculation: Day Rate x 5 days (per week) x 46 weeks (per year)
• They then add their income multiplier, which is usually x 5 or x 5.5

What they don’t ask for is your accounts or SA302. Contract-based underwriting uses your gross day rate. If you walk into a lender, tell them that you’re a day-rate contractor and they then ask for your accounts, you’re probably in the wrong place.

Here are the links to more detailed guides to day rate contractors and the other types of contractors the term now covers:

• Day-rate (Ltd Co) contractors
• IT contractors
• Umbrella contractors/employees
• CIS Contractors
• Zero-hours contractors

5. Can I borrow based on future earnings? (Projections)

The flexibility to use income projections is where specialist lenders really shine. Imagine you’ve completed one year, but your second year is looking much better. Maybe you’ve signed a big new client or raised your prices. If you can prove this is sustainable, a lender might accept a Projection.

For ‘evidence’, your accountant will write a reference confirming that your business is growing. They’ll also predict your income for the current year based on that growth. Some lenders will use this higher predicted figure to determine how much you can borrow, instead of last year’s lower historic figure.

6. The income multiplier

Whether you use payslips, accounts of a contract as evidence of income, you will end up with a theoretical (if not actual) annual income figure. To see how much you could borrow, the lender will add their income multiplier to arrive at a definite maximum borrowing ceiling.

For self-employed borrowers, lenders cap your borrowing at 5 x your annual income. If you’re a contractor, they tend to go up to 5.5 x your annualised income. In exceptional cases, they’ll even go up to 6 x annualised income, but that’s not the standard.

• Example 1: if you’re a sole trader and your first year’s profit was £40,000, the max loan is roughly £200,000
• Example 2: if you’re a contractor with an annualised income of £40,000, the most you’d be able to borrow would be £220,000

Note: there are circumstances in which the income multiplier can be lower. If you have bad credit, for example, or limited work history or other debts (car finance, credit cards), the lender may offer you less than their standard multiplier.

7. Why you need a specialist mortgage broker

In-branch advisors and call centre agents are unlikely to approve your mortgage if you have just one year’s accounts. It’s even more unlikely that they’ll give you access to their specialist underwriters.

A specialist mortgage broker can be the medium you need to bridge that gap. That’s because:

1. They have access to specialist lenders, many of whom accept one year’s accounts and rarely deal with the public direct
2. They know how to package your application so it looks professional and underwriters can see your true mortgage affordability at a glance
3. Their relationships with specialist underwriters can give them crucial leeway to argue your case if your income or business structure is super complex

The bottom line: Being self-employed is a valid career choice, but you shouldn’t have to sacrifice your dream of homeownership for it. You deserve a mortgage just as much as a PAYE employee, perhaps even moreso.

You’ve now seen the barriers and where they lie. The next step: get the right team on board to help you prove your mortgage affordability to an amenable underwriter. Having got this far, it’s easier than you think.