How Is Self-Employed Income Calculated For a Mortgage

Find out how self-employed income is calculated for a mortgage and what it means for you

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Home Self Employed Mortgages How Is Self-Employed Income Calculated For A Mortgage
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: May 16, 2024

If you’re thinking of getting a mortgage while self-employed, one of the main factors that will affect your application is your income.

Lenders will consider a wide range of factors before they lend to you, such as the type of income you have, whether your income is consistent or has fluctuations and your credit history. Whether you’re a contractor, sole trader or director will also play a role.

In this article, we’ll look at the different types of self-employment, income types and more to see how this might impact your mortgage application.

Type of self-employed income

Self-employment is a broad term that covers a lot of people. Company directors and freelancers are considered self-employed, but the income between the two can vary a lot.

We’ve broken down this section by income type to help you get an idea of what applies to based on your status.

Sole trader

If you’re a sole trader, the minimum time you’ll need to have been trading as one is 12 months. This also applies if you’re a partnership. However, most lenders will require 3 years of trading history before considering your application, with some happy with two years of accounts.

As a sole trader, lenders will assess your income on your net profit. This is the income you have left over after you’ve deducted business expenses. Consistent or growing profit will help your application, as lenders are more likely to consider you less of a risk than if your income fluctuates.

The minimum deposit you’ll need to apply for a mortgage is around 5% to 10%, although some lenders will require a larger deposit of around 20%.

Documents required:

  • Personal tax returns (usually the last two to three years)
  • SA302 forms from HMRC
  • Tax year overviews

Director

The income of company directors is typically assessed on a combination of salary and dividends. Some lenders will also consider the retained profits in your company during an application, but you may need the help of a specialist broker to find a lender willing to take this on.

The longer your company has been running, the more likely you are to be approved for a mortgage. Lenders prefer a minimum of two to three years of accounts, but some will consider lending to you if you’ve been operating for less than a year. Bear in mind, the pool of lenders available to you will be smaller and you’re unlikely to qualify for the lowest interest rates.

The minimum deposit you’ll need is 5%, but a deposit of 15% and above will give you access to a wider range of lenders.

Documents required:

  • Personal tax returns
  • SA302 forms and tax year overviews
  • Company accounts (usually the last two to three years) prepared by a certified accountant
  • Dividend vouchers
  • Bank statements showing salary and dividend payments

Partnership

If you’re a partner in a business, your income is assessed based on your share of the partnership’s net profit. A simple way of looking at this is as follows, the max loan a lender is willing to give you will depend on your share of net profit or total income received x a multiple of your income. This is typically 4.5x your income or 5 times.

Lenders will consider the growth and stability of your share of the partnership’s income before lending to you. If you can show stable returns and steady income growth, more lenders will be likely to loan to you.

The minimum deposit is similar to that for a sole trader. You’ll need a deposit of at least 5%, with a larger deposit of 15% to 20% making you more favourable to most lenders.

Documentation Required:

  • Personal tax returns
  • Partnership accounts
  • SA302 forms and tax year overviews
  • Bank statements showing profit share payments

Contractor

As contractors typically have irregular income it can be harder to get a mortgage. Lenders will assess your income on an annualised day rate (a daily rate multiplied by the number of working days in a year) or on your average earnings over the last few years.

It’s important to keep your contracts, as lenders may ask to see them during the application process. The length of your contracts can play a big role in whether lenders will loan to you or not. Longer contracts will be favoured over shorter ones, as will stable contracts showing you’ve had a steady income for several years.

Documents required:

  • Current and previous contracts
  • Personal tax returns and SA302 forms (if applicable)
  • Bank statements showing contract payments

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Factors that affect whether your income will be considered for a mortgage

As well as the type of income you have, lenders will consider several other factors before they loan to you. Here are some of the most important you should consider:

How long have you had the income for?

As a general rule, the longer can show consistent income the more lenders will look favourably on your application. It is possible to get a self-employed mortgage with 12 months of accounts but you’ll increase your chances if you show two to three years of income.

This will show lenders that you can make monthly repayments and make you less of a risk in their eyes.

Type of income

The type of income you have will make a big difference to your application. If all your income comes from one client if you’re a contractor, you may be deemed more of a risk to lend to than someone with multiple clients.

Whereas, if you’re a self-employed plumber receiving payments from multiple clients, you’re less of a risk as your income isn’t dependent on one client.

If you have other income from a buy-to-let property or investments, this will strengthen your application.

Future income trajectory

Where your income is headed in the future is another important factor for lenders. They will want to consider the future trajectory of your income before they lend to you.

If your income is falling, this could impact your application. But if you can show a steady income and the likelihood that this will continue or even increase, lenders will be more inclined to loan to you.

Income stability

Fluctuating income is a worry for lenders as it suggests you might struggle to meet your monthly repayments. If you can show lenders you have consistent income across several years, your chances of getting approved for a mortgage will increase.

With most self-employed mortgages assessed over a two to three-year period, you’ll want your accounts to show consistent income over this period. If you do have fluctuations, you will need to explain to lenders what is causing this, such as if your business is seasonal.

Credit history

While it’s possible to get a self-employed mortgage with bad credit, it will be harder to secure one if your credit history has blemishes on it. Lenders use your credit history to assess the risk of lending to you and your financial responsibility, so it’s important to have a good credit score.

The better your credit score, the more likely you are to get better mortgage terms as lenders will see you as less of a risk to lend to.

Overseas income

While you can get a mortgage with foreign income, it’s not easy, as most lenders are reluctant to consider income that originates from outside of the UK. This includes money earned from crown dependencies such as the Channel Islands and the Isle of Man.

If you’re based in the UK and paying tax here, this will help your application. Likewise, suppose you’re a contractor working for a large company based in America. In that case, this will increase your chances of your income being considered as opposed to working for a small, unknown foreign company.

Self-employed calculator

To get a better idea of how much you’ll be able to borrow given your status and current profit as a self-employed individual, use our calculator below:

Self-Employed Mortgage Calculator

This mortgage calculator enables self-employed individuals to calculate their maximum borrowing amount based on their trading style, income type, and other key variables.

Select your employment type from the menu

Your Results:

You could borrow up to 

Most lenders would consider letting you borrow

This is based on 4.5 times your net profit or the total income declared. To borrow more than this, you will need to speak to a mortgage broker who specialises in self-employed borrowers

This is based on 4.5 times your share of the partnership's net profit or total income declared. To borrow more than this, you will need to speak to a broker who specialises in self-employed borrowers

This is based on 4.5 times your share of the net profit/salary plus dividends, or total income declared. To borrow more than this, you will need to speak to a broker who specialises in self-employed borrowers.

This is based on 4.5 times your income. To borrow more than this, you will need to speak to a broker who specialises in self-employed borrowers.

Some lenders would consider letting you borrow

This is based on 5 times your net profit or your total income recieved. This income multiple is often unavailable to borrowers who aren't applying through a mortgage broker.

This is based on 5 times your share of the partnership's net profit or your total income recieved. This income multiple is often unavailable to borrowers who aren't applying through a mortgage broker.

This is based on 5 times your share of the net profit/salary plus dividends, or your total income recieved. This income multiple is often unavailable to borrowers who aren't applying through a mortgage broker.

This is based on 5 times your income. This income multiple is often unavailable to borrowers who aren't applying through a mortgage broker.

A minority of lenders would consider letting you borrow

This is based on 6 times your net profit or the total income declared. This income multiple is only available under specific circumstances and is usually only accessible via a broker.

This is based on 6 times your shares of the net profit or total income declared. This income multiple is only available under specific circumstances and is usually only accessible via a broker.

This is based on 6 times your share of the net profit/salary plus dividends, or total income declared. This income multiple is only available under specific circumstances and is usually only accessible via a broker.

This is based on 6 times your income. This income multiple is only available under specific circumstances and is usually only accessible via a broker.

Now that you have a rough idea of your maximum borrowing, get in touch to speak to a mortgage broker who can provide bespoke calculations and access to the best rates and deals.

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How a mortgage broker can help

Getting the right advice is crucial if you’re self-employed and wondering whether you can get a mortgage with your current income. This is where a mortgage broker specialising in self-employed mortgages can help ease the process.

They’ll weigh up all elements of your financial situation and determine which lender offers the best terms for you. Additionally, they can make your entire application process smoother and help ensure you are approved the first time.

Our free, no-obligation broker matching service will connect you with the best advisor for you. Call us on 0808 189 2301 or enquire with us today so we can put you in touch with a specialist.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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