Posted on: June 28, 2024
Do lenders treat self-employed applicants differently?
The short answer is yes they do. There is a clear difference between how a self-employed person is underwritten compared to an employed person.
As a self-employed applicant lenders consider that there is a higher risk of default due to risks of being self-employed.
What income will a lender take into account?
As a sole trader a lender will take into account your net profit declared on your Inland Revenue Tax Calculation. Some lenders will take into account the most recent years profit, others will take an average of the last two or three years.
As a Ltd Company director a lender will normally take into account dividends and salary. This will be reflected on an applicant’s Tax Calculations and Tax Year Overviews. Again lender will want to see the last two or three years and again they may average income. However where a business leaves profit in the business, some lenders will take the applicants share of profit instead.
What will a lender want to see as evidence of income?
This depends on whether an applicant is a sole, trader, partnership or Company director. There is a clear difference in how profit and income is declared. As a sole trader or in a partnership your declare a net profit to the Revenue, where as a Ltd company director receives a mixture of salary and dividends, as well as potentially leaving profit in the business.
Sole Trader/ partnership – A lender will want to see the last three years Tax Calculations and Tax year overviews. They may also want to management accounts
Directors and Ltd Companies – A lender will want to see the last three years tax calculations and Tax Year Overviews. In addition to this they may need to see management accounts, or information from the firm’s accountant. Occasionally a lender will want to see business bank statements to sense check the application.
How much deposit will a self-employed applicant need?
It is fair to say that lenders consider self-employed applicants to be higher risk. And in this regard some lenders will ask for a higher deposit, but as we move away from the effects of the Covid pandemic, some lenders will consider applications with a 5% deposit.
How much will a lender lend to a self-employed applicant?
Lenders use “affordability calculators” to make a decision on how much to lend. This takes a more holistic view of a borrower’s situation, their outgoings, the mortgage term, credit commitments and domestic running costs. As stated previously a lender may use an applicant’s most recent year’s income or an average of the last 2 or 3 years.
A lender usually caps lending at 4.5 time income, although in some circumstance with higher deposits and longer term fixed rates they can increase this to 5.5 times income.
How long can a self-employed applicant borrow the money over?
Typically a lender will allow terms of up to 40 years. Although a borrower should consider the shortest affordable term as the longer the term the higher the overall cost.
A lender or mortgage adviser will also be interested in your stated retirement date to ensure that you don’t end up with an unaffordable mortgage in retirement. The lender will want to sense check that the terms is sensible and realistic in regard to the term and retirement dates stated. For example a builder saying they want to retire at age 75, would probably be considered unrealistic.
How can I get more detailed information?
You can speak to one of our qualified mortgage advisers by contacting Craig Power (craig.power@villagefs.co.uk) or Luke Spires (luke.spires@villagefs.co.uk) or you can call 0118 9410026.
Alternatively Contact Us online
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The information contained within was correct at the time of publication but is subject to change 01.06.24
