Mortgage with one year's accounts: can the newly self-employed still buy a home?

Can you get a mortgage with one year's accounts? Experts told Newspage a number of UK mortgage lenders are willing to consider self-employed applicants with just a single year’s figures.

Mortgage experts say choosing the right lender can dramatically increase borrowing potential, with one limited company director securing £666,000 compared with an initial offer of £272,000 on the same income from their own bank.

Finance specialists explain how sole traders, company directors and contractors are assessed, and whether it costs more.

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

Self-employed people with only one year’s accounts can get a mortgage, and in some cases without paying a higher rate, experts have told Newspage.

Toby Quanstrom, Director at Eastbourne-based Quanstrom Financial, commented: "The common belief is that 2-3 years of self-employed history is needed. The reality is: only one year is required, or even less for some contractors. Using a broker to place you with the right lender is the most important thing to do. One of our clients set up a limited company a year ago and was offered £272,000 by their own bank, based on one year’s salary and dividends.

“We placed the client with a lender that used salary plus net profit before corporation tax instead, and they borrowed £666,000. Lenders such as Halifax and HSBC can consider one year’s figures, with no automatic rate premium or bigger deposit, or even specialist lenders such as Gen H, Pepper Money or The Mortgage Lender. Some want to see similar work beforehand, but projections are rarely needed. Contractors have even more flexibility: depending on the contract, lenders may use the day rate, contract value or monthly payslips or invoices."

Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, commented: "One of the biggest misconceptions in the mortgage market is that self-employed people need two or three years of accounts before they can buy a home. That's simply not true. Some lenders accept one year's accounts, but the strength and sustainability of income matter enormously. For sole traders, lenders typically assess net profits.

“For company directors, salary and dividends are common, although some consider retained profits. Contractors may be assessed using their day rate and contract history. Previous industry experience, an accountant's reference and up-to-date trading figures can strengthen an application. 

"One year's accounts doesn't automatically mean paying a higher interest rate or borrowing less. My biggest frustration is seeing capable business owners assume they're ineligible because someone told them to come back in two years. A good mortgage adviser should investigate the options, not dismiss the borrower."

Manooch Suree, Director at Uxbridge-based Zinga Financial Services, commented: "There’s a widespread belief that self-employed borrowers need 2 or 3 years of accounts to secure a mortgage. That is outdated. A number of lenders will consider a single year’s figures, or base their assessment on the most recent year’s income. What matters is whether the lender is satisfied that the income is sustainable rather than a one-off. They will want evidence that the business is established and likely to keep performing.

“Every lender calculates income differently, and that applies equally to sole traders and limited company directors. The same applicant can be accepted by one lender and declined by another, which is why specialist advice is essential. We have recently helped clients in a similar position, with just one year’s accounts where we were able to secure a higher loan amount than their bank. An experienced mortgage adviser in this space will know which lenders are best suited to your circumstances."

How do lenders assess sole traders, company directors and contractors?

One adviser said borrowers with one year’s accounts may find fewer lenders and slightly higher costs.

Rohit Kohli, Senior Mortgage Adviser - Residential & Commercial at Romsey-based The Mortgage Stop, commented: "It’s absolutely possible to get a mortgage with one year’s accounts, but you need to be realistic. A few lenders will do it, but they’re taking a bigger risk. They may not lend you as much as with two or three years of accounts, and it could be slightly more expensive. Lenders will look at how you’re trading now. If you’re 18 months in, they’ll use your last year’s figures and your most recent six months to check the business is on course. If you’re professionally qualified, some lenders are slightly more generous.

“Sole traders are usually assessed on net profit, and limited company directors on salary and dividends, although some lenders consider their share of company profits. Contractors are different, as many lenders want more evidence of how long they’ve been contracting. However, we recently helped a contractor with nearly 10 years in the same field before going out on his own. We secured his mortgage based on his day rate because of his two-year contract and track record."

Stephen Perkins, Mortgage Broker and Managing Director at Norwich-based Yellow Brick Mortgages, commented: “The idea that every self-employed borrower needs two or three years of accounts is outdated. A number of mainstream lenders will consider someone with just one year's figures, particularly where they previously worked in the same industry and the income looks sustainable. It also does not automatically mean paying a specialist-lender rate. 

"The real issue is lender choice and how income is assessed. A sole trader, limited company director and contractor can all earn the same amount but have very different mortgage figures depending on the lender. With only one year's accounts, choosing the right criteria becomes much more important.”

How can you improve your chances with only one year’s accounts?

Lenders want reassurance that a first year’s income is sustainable rather than a one-off.

David Stirling, Independent Financial Adviser at Belfast-based Mint Wealth, commented: "Being self-employed for only a year doesn't mean your mortgage application has to spend another year sitting in the doldrums. Some lenders will work with one year's figures, especially where there's a strong deposit, good credit profile and a logical progression from employment into the same line of work. 

"The complication is that lenders can look at exactly the same business and arrive at very different incomes – sole traders are generally assessed on profit, directors may be assessed on salary and dividends or share of company profit, and contractors may have their contract or day rate annualised. So one year's accounts isn't necessarily a deal-breaker, but choosing the wrong lender certainly can be."

Steven Greenall, Mortgage and Protection Advisor at Dunmow-based Protect & Lend, commented: “I've recently advised a young couple who are both self-employed with one year’s accounts. Some lenders will also require latest year’s projections, but yes there are lenders who will just go off one year. It helps if there is a reasonable deposit and the clients are in careers where earnings are viewed as sustainable or increasing."

What do lenders look at instead of a second year’s accounts?

Lenders lean on other evidence: recent bank statements, an accountant’s reference or projection, and the borrower’s work history before they went self-employed, experts said.

Malcolm Davidson, Director at Hull-based UK Moneyman, commented: "It’s hard not to feel for the self-employed and owners of small businesses in the UK right now. In the Budget we saw the Government slash the Business Asset Disposal Relief in half and they are certainly treated very differently to employed people when it comes to getting a mortgage. Whilst many high street lenders want two years’ worth of accounts there are others who only want one year and, to be fair, borrowers who qualify tend not to be disadvantaged in terms of rates on offer.

“The key difference though is that lenders tend to look at the current financial position of an employee but in the rear-view mirror for a business owner. So therefore a self-employed customer whose profits are on the up and up won’t see the benefit of that in terms of maximum borrowing until the following year’s accounts are submitted. Compare that to an employed person who can get a mortgage based on one payslip or even a job offer letter and contract for a job they haven’t even started yet!"

Will you pay a higher rate or need a bigger deposit with one year’s accounts?

Experts told Newspage that borrowers placed with the right mainstream lender can often get the same rates as anyone else.

Richard Davidson, Mortgage Advisor at onlinemortgageadvisor.co.uk, commented: "It's far more doable than most self-employed people are told. The clients I get over the line on one year usually did the same job on a payslip before going it alone, because that track record is what reassures a lender. Done through the right mainstream lender, they often pay the same rate as anyone else, and with no weaker earlier year dragging down an average, a strong first year can even mean borrowing more.

“The catch is that some lenders want a bigger deposit. Contractors tend to have it easiest, as many lenders simply work off their day rate, while directors are judged on salary and dividends and sole traders on their tax return. What frustrates me is that sole traders turning over more than £50,000 now send HMRC their figures every quarter, yet lenders still wait for a finished tax year. Those numbers should count for something."

Self-employed mortgages: your questions answered

Questions answered by Toby Quanstrom, Director at Eastbourne-based Quanstrom Financial.

Can I get a mortgage if I’ve been self-employed for less than a year?

Yes, it is usually possible, but your options narrow. Most lenders want two years of accounts or tax returns, and a growing number will consider one. Under a year, a small number of lenders may still help if you are a contractor and earn a day rate. Expect more questions, and some lenders may ask for a bigger deposit (though not always).

How much can I borrow on a self-employed mortgage? 

Most lenders offer around 4.5 times income, and some go to 5 or 5.5 times. A few may go up to 6.5 times for higher earners, subject to criteria and deposit. For the self-employed, though, the bigger question is which income the lender uses. A sole trader is usually assessed on net profit. For a company director, one lender may use only salary and dividends, while another may include your share of the company’s profit. We recently had a director whose own bank offered £272,000 on salary and dividends, and we secured £666,000 with a lender that looked at company profit.

What documents do I need for a self-employed mortgage? 

Sole traders and partners will usually need their latest one or two years of SA302 tax calculations and the matching HMRC tax year overviews, depending on the lender. Limited company directors usually need the same for their salary and dividends, plus the latest one or two years of company accounts. Some lenders also ask for an accountant’s reference or certificate, and many want recent business and personal bank statements. As with any mortgage, you will need ID, proof of address and evidence of your deposit. Getting your tax returns and accounts filed promptly is the simplest way to avoid delays.

Do lenders count retained profits for limited company directors? 

Some do, and it can make a big difference. Many lenders assess company directors only on the salary and dividends they take out. Others will look at your share of the company’s net profit, which includes money you have left in the business. That matters because many directors deliberately take a low salary and modest dividends for tax reasons, so on paper they look like they earn far less than the business does. Each lender has its own approach. This is one of the main reasons a broker can help directors, because the right lender can change how much you may be able to borrow.

Do I need an accountant to get a self-employed mortgage? 

Not always. Sole traders can often use their SA302 tax calculations and tax year overviews straight from HMRC, so many lenders will not insist on an accountant, though having one can help, especially if your figures are complex. For limited company directors it is different. Many lenders want company accounts prepared by a qualified accountant, for example a chartered or certified accountant, and some may accept other qualifications. Some lenders will also contact your accountant to request an accountant certificate. If you are self-employed and thinking about buying in the next year or two, using a qualified accountant can widen your choice of lenders.