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If you’re an employee, mortgage providers use your income as proof of their earnings and ability to afford mortgage repayments. However, if you’re self-employed, things work a little differently.
For sole traders
Mortgage lenders will first look at whether your income has increased or decreased in recent years. If it’s trending upwards, an average income will be determined based on the past few years’ figures. However, if your income is currently lower than previous years, this is the figure which will be used as a basis of their mortgage offer.
Mortgage lenders are becoming more familiar with the income structure of contractors, with many now using daily rates of pay to calculate the amount they’d be happy to lend. Obviously, the longevity and stability of the income will be used to determine the borrowing allowed, so make sure that you keep adequate records.
For partners or company directors
Mortgage lenders will first look at whether your income has increased or decreased in recent years, they will also read your accounts to see how the turnover is being accounted for. Many lenders now look at not just net profit, but also retained profits, salary and dividends.
What documents do I need?
To apply for a self-employed mortgage, you usually need to have your accounts – prepared by a chartered accountant – or your self-assessment SA302 year-end tax calculation to hand, as proof of your income.
How much can I borrow?
As a rule of thumb, lenders tend to allow you to borrow up to five times of your annual income for all mortgages. So, the fact that you’re self-employed shouldn’t get in the way with how much you are allowed to borrow.
However, if you’ve been self-employed for less than three years, this may affect how much you can borrow. If you only have one year’s accounts, you may need to have a deposit of at least 10% or a guarantor. To find out how much you can borrow based on your self-employed annual income, use our handy mortgage calculator.