Newly Self-Employed Mortgages

Main guide

What is a newly self-employed mortgage?

A newly self-employed mortgage is not usually a separate mortgage product. It is a mortgage application for someone who has recently started working for themselves and does not yet have a long trading history.

This could include a sole trader, freelancer, contractor, partner or limited company director. The main issue is how the lender can evidence income and decide whether the mortgage is affordable.

Many lenders like to see two years of accounts or tax documents for self-employed applicants. However, that does not mean every newly self-employed applicant has to wait two full years. Some lenders may consider one year of trading, especially where the business is established, income is stable and the applicant has relevant experience.

Why newly self-employed cases need careful lender choice

New self-employment can be harder for lenders to assess because there is less income history. A lender wants to understand whether the income is reliable and likely to continue.

For example, someone who leaves employment as an electrician and starts a self-employed electrical business may be viewed differently from someone starting a completely new business in an unfamiliar sector. The first applicant may have a clearer track record in the same line of work.

Lenders may also look at whether the income is increasing, whether there are regular contracts, whether the business has stable bank statements and whether the applicant has a strong deposit and credit profile.

The amount someone can borrow depends on income, outgoings, deposit, credit history, property type and lender criteria. Mortgage approval is not guaranteed.

Your home may be repossessed if you do not keep up repayments on your mortgage.

What documents do lenders ask for?

The documents needed depend on how long you have been trading, how your business is structured and which lender is being considered. A mortgage adviser can help check what is likely to be required before applying.

Lenders may ask for:

• latest tax calculation or SA302
• tax year overview
• finalised accounts
• accountant details or accountant certificate
• business bank statements
• personal bank statements
• contracts or invoices
• proof of deposit
• previous employment history
• explanation of business activity
• forecast or management accounts in some cases

Sole traders are often assessed using net profit. Limited company directors may be assessed using salary and dividends, company profit or other accepted income depending on lender criteria. Contractors may sometimes be assessed using contract day rate, depending on the case.

If you only have one year of figures, the lender may look more closely at the wider picture. They may consider whether you worked in the same industry before becoming self-employed, whether income appears sustainable and whether the business bank statements support the declared income.

It is important not to rely on turnover alone. Lenders usually focus on profit or accepted income, not just sales. A business with high turnover but low profit may not support the borrowing expected.

Can you get a mortgage with one year of accounts?

It may be possible to get a mortgage with one year of accounts or one year of self-employed tax documents, but it depends on the lender and the wider case.

Some lenders prefer two years because it gives them more evidence of income stability. Others may consider one year if the figures are strong, the deposit is suitable, the credit profile is clean and the applicant has experience in the same field.

The lender may still take a cautious view. If the first year’s income is unusually high, they may ask whether it is sustainable. If the business is seasonal or income fluctuates, they may want more evidence.

Moving from employment to self-employment

Previous employment can sometimes help. If you were employed in the same type of work before becoming self-employed, the lender may be more comfortable that you have a track record in the industry.

For example, a employed graphic designer who becomes a freelance graphic designer may have a clearer income story than someone starting a completely new business without previous experience.

This does not guarantee approval, but it can help explain the background to the lender.

Limited company directors and new businesses

Newly self-employed limited company directors can be assessed in different ways. Some lenders may look at salary and dividends. Others may consider company profit or retained profit where criteria allow.

If the company has only recently been set up, lender choice may be more limited. The lender may ask for accounts, bank statements, accountant comments or evidence that the business has a stable income stream.

A change from sole trader to limited company can also need explanation. Some lenders may consider the overall trading history if the business activity is the same, while others may focus on the new company’s accounts.

Affordability, deposit and credit profile

Newly self-employed applicants still need to meet normal mortgage checks. Lenders will review affordability, commitments, dependants, credit history, deposit and property details.

A larger deposit can sometimes improve lender choice, but it does not guarantee approval. The lender still needs to be comfortable that the income evidence supports the mortgage and that repayments are affordable.

Credit profile can also matter. If you have recent missed payments, defaults or high unsecured debt, lender options may be more limited.

Common mistakes to avoid

A common mistake is applying before the first year’s tax return or accounts are ready. Without usable income evidence, lender options can be much more limited.

Another mistake is assuming that business turnover will be used as income. Most lenders want profit or accepted personal income.

It is also important not to overstate income at Decision in Principle stage. If the documents do not support the figure used, the full application may be reduced or declined.