Can I get a mortgage with one year’s accounts?

Self-Employed people, (including those who own more than 20% shares in a Limited Company) often worry that they will find it more difficult to get a mortgage. This is especially the case when looking to get a mortgage with one year’s accounts.

Often lenders will request two or three years’ worth of accounts, but there could be options for people with less than this.

Could I get a mortgage if I’ve only been Self-Employed for one year?

This is potentially possible, but there might be some key factors.

The lender may seek further assurances as a Self-Employed person’s income could be perceived as less predictable compared to someone on a salary.

For example, the lender may want to know about your track record before you went self employed. Were you in the same industry? Have you switched from being a sole trader to a limited company simply because it’s more tax efficient?

The lender may also seek further information from your Accountant. This could be to get their opinion on the sustainability of your business and whether profits are likely to increase in the future.

How do I prove my income with only one years’ accounts?

You prove your income by sharing documents, usually a set of accounts certified by a suitably qualified accountant and/or your self-assessment forms for the last tax year. Management accounts and/or a projection for the current year may also be required to prove sustainability, but it’s unlikely these figures will be used when calculating affordability.

Bank statements (business and personal) will usually be required by a lender, but will not be used to prove income. They may wish to see that the transactions support the turnover on the accounts, but will not use any incoming transactions as income for mortgage purposes.

As with any borrowing, lenders will also look at your credit score. Small scale debts or late payments aren’t usually a problem, but if you have particularly bad credit such as CCJs or bankruptcy you could have a very narrow choice of lenders and higher interest rates.

How does it work for a Sole Trader, a partnership or if I have a Limited Company?

Sole traders: Lenders will see your business profits as your income. They will often request self assessment records to confirm your income.

Partnerships: You will be assessed on your share of the partnership’s profits. Either company accounts or tax details are usually needed.

Limited company: The mortgage provider will usually look at your final accounts for the year. Your loan amount is usually based on your stated salary and dividends. However, some lenders will use your net profit, which usually means you could borrow more.

How is Affordability Calculated?

This will depend on the lender.

Some will consider the taxable income which is showing on your self assessment tax return. For Limited Company Directors, lenders will usually consider the Director’s salary plus any dividends taken.

For Limited Companies, there are some lenders who may consider your share of net profits in addition to your Director’s salary. Depending on the lender, they may consider your share of company profit either pre or post tax.

The result could differ greatly depending on the lender selected so it’s important to get the right advice.

How much could I borrow?

Mortgage lenders will usually let you borrow around four to five times your income. This tends to be the same for everyone, regardless of their employment status. Other key factors will include your age, liabilities, financial dd and credit score.

Each lender has their own criteria and affordability model so it’s important to consider all of the options available to determine how much you can borrow.

Other factors taken into account in addition to income are –

• Your liabilities
• Your credit score
• Your age
• Your financial dependents

The lack of sick pay makes self-employment more risky than a traditional employed job, so you might want to consider insurance to ensure you can meet all repayments on your mortgage. Income protection pays your bills if you can’t work due to illness or injury.

What deposit will I need for a mortgage with one year’s accounts?

The absolute minimum for a deposit is 5% of the property value. However, you need good credit for this level of borrowing and rates could be higher. The loan amount could also be capped with a lower deposit.

If you can save up 15% or more you will get better rates and a wider choice of lenders. The size of your monthly repayments will fall as the deposit increases.

A deposit of 25-40% will usually give access to the most competitive rates.

What should I do to prepare?

If you are looking for a mortgage with one year’s accounts, the best thing to do is seek the right advice. Ideally this will be well in advance of when you need the loan so that you can properly prepare.

Make sure you get the basics right. Check your credit score, maintain the payments on any credit agreements and keep your bank statements looking healthy.

Never assume anything. For example, many people assume that they need 3 years accounts so they don’t move ahead with their plans. Others assume that they need to pay themselves a higher salary or take dividends they don’t really need and pay unnecessary tax bills which still doesn’t achieve the desired outcome.

Any course of action which isn’t based on the right information could be costly so make sure you seek specialist advice from the right people so that you can make good informed decisions.