By the end of 2019, more than 5 million people in the UK were self-employed, according to the latest figures from the Office for National Statistics (ONS). This represents an increase of 1.8 million self-employed since 2000. And the self-employed currently account for 15.3% of the total workforce – up from just 12% in 2000.
The prospects for self-employed mortgages, therefore, remain a keen interest for a significant proportion of the population.
The good news is that the market has changed sufficiently to encourage some – but not all – mortgage lenders to accept just a year’s worth of accounts from a self-employed applicant for a mortgage advance.
Why can it be challenging to find self-employed mortgages?
History suggests that if you are self-employed, you are going to have a harder time getting a mortgage. The problem comes down to the relative difficulty you face in convincing any prospective lender that you have a sufficient and reliable income. If you are self-employed, it is more difficult to provide the type of evidence and proof of income typically required by mortgage lenders.
After the financial crisis of 2008, lenders became even more cautious and risk-averse, making it still more difficult for the self-employed to get sufficiently watertight proof of income. Compared to someone earning their declared income from an employer, the self-employed were instead regarded by mortgage lenders as higher risk.
Indeed, in September 2011 a joint initiative by the Council of Mortgage Lenders (CML) and HM Revenue & Customs was set up to verify the information provided by some mortgage applicants so that further investigations could be made about the accuracy of the details they provided.
This was a time when practically every mortgage lender was likely to request a minimum of two or three years’ audited accounts as proof of a self-employed applicant’s income.
The market response
Despite further caution and checks imposed by the regulator, the Financial Conduct Authority (FCA), the market has evolved and changed in line with changing patterns of employment and earned income – including that from self-employment.
The mortgage industry has necessarily adapted to the stark rise in the sheer number of self-employed in the UK, for instance, and the dynamic and fluid nature of a world in which businesses respond to fast-moving opportunities – and income for the self-employed may fluctuate quite wildly from one year to the next.
Against this background, therefore, there are now more mortgage lenders prepared to assess the affordability and reliability of advances granted to the self-employed on the strength of just one year’s accounts. There are other indicators of the self-employed person’s creditworthiness and the financial standing of his or her business, of course, that may be considered alongside any declared income.
Whereas many lenders might once have required three years’ worth of audited accounts as evidence of a consistent level of income, there is an increasing number of lenders content with just the past year’s accounts.
This flexibility in regard to proof of income is by no means widespread across the whole of the mortgage market. Barclays Bank, for instance, in most cases, continues to insist on proof of income for at least the past two complete tax years if you are self-employed.
In other words, if you are self-employed, with only one year’s worth of accounts to hand, getting specialist assistance from a suitable mortgage adviser makes sense. They will know the most suitable lender for you to apply to, in terms of their lending criteria and them offering an appropriate deal.
Once you have found that lender, you may also discover that an alternative to applying for a mortgage using last year’s accounts may be a simple confirmation from the taxman about the income you earned and the tax you paid – not only last year but in the previous four years.
Provided you have filed the necessary self-assessment tax returns, it is a simple matter to print out the form SA302 confirming your declared income. The HM Revenue & Customs (HMRC) website explains how you can use their online service to print the necessary confirmation (by logging onto your HMRC account)
If you use commercially available software to complete your annual self-assessment tax returns, you may use that programme to print the necessary information about the income you have earned and declared to HMRC in any given year.
In short, once your mortgage broker has found you the most suitable mortgage lender, there is unlikely to be any problem supporting your declared income on the strength of using your latest year’s accounts – or by providing form SA302 which offers official confirmation of your earnings.