Copy article

"Many self-employed borrowers want to beat the tax man and the mortgage man at the same time but this is impossible"

ended 07. October 2024

Being self-employed means it can often be harder, or certainly more time-consuming, to get a mortgage.

A fundamental problem, according to brokers, is that accountants are looking for ways to minimise tax liability but this can mean that the income that can be used for mortgage applications doesn't match what the business owner wants to borrow.

“Many self-employed borrowers want to beat the tax man and the mortgage man at the same time but this is impossible”, says broker, Mike Staton.

“Accountants often use creative accounting to reduce tax liabilities, but this can lower your reported income, impacting mortgage affordability. Lower taxes mean lower income”, adds mortgage broker, Harps Garcha.

Meanwhile, mortgage adviser Darryl Dhoffer says: "If you're self-employed and dreaming of owning a home, buckle up because it’s like trying to explain quantum physics to your cat."

Newspage asked mortgage brokers about the biggest challenges self-employed borrowers face and the best way to overcome them.

15 responses from the Newspage community

Copy all

Star Quote
Copy

Editor
Mike Staton
Director at Staton Mortgages
Many self-employed borrowers want to beat the tax man and the mortgage man at the same time but this is impossible. It isn't more difficult to get a self-employed mortgage if you know what you are doing. This has always been a black hole in my opinion. Where I see many self-employed applicants fall down is because they want to buy an unrealistic priced property compared to the income they receive. In a nutshell, be prepared to pay the tax if you want to buy a decent property. Many brokers try to make out that self-employed is a difficult mortgage, they then claim to be specialists, then charge a premium to do an application for the clients.
Star Quote
Copy

Editor
Harps Garcha
Director at Brooklyns Financial
PAYE income is straightforward for mortgage assessments, as it’s typically based on a fixed salary. However, non-PAYE income is more complicated, depending on whether you are a contractor, sole trader, or running a limited company. Accountants often use creative accounting to reduce tax liabilities, but this can lower your reported income, impacting mortgage affordability. Lower taxes mean lower income. Some lenders may consider business profits as personal income, but it’s important to avoid creative accounting to reduce your tax liability. Non-PAYE applicants should plan ahead, as lenders often review income from the last 1-2 years, unlike PAYE, which focuses on the last 3-6 months.
Star Quote
Copy

Editor
Simon Bridgland
Director at Charwin Private Clients
Most people with a business really appreciate the work their accountants do in reducing the liability to taxation, however it can often scupper the mortgage application. It works in borrower's favour to have as low a taxable income as possible, but it means most lenders won’t be willing to help out to the extent that the applicant feel they should. Low income equals low loan amount. Clients would like to have their cake and eat it, but unless the lender will allow use of, say, the company profit, it can fall short. Low salaries, dividends, retained profits, having a spouse work in the family business, will all change what can be borrowed. The company could have a large capital outlay one year, meaning the amount useable is dramatically lower. My best advice is to keep the accountant in the loop with your plans. If you are planning a move or mortgage change in the next year or two, liase early with your broker and accountant to make them aware. Income structure can make the difference.
Star Quote
Copy

Editor
Jack Tutton
Director at SJ Mortgages
Self-employed borrowers have long had difficulties in obtaining mortgage borrowing due to what can sometimes be complex income structures and differing lending policies between lenders. It is important to position self-employed income in line with what is acceptable to the lender that you are applying with, which could be salary and dividends or salary and net profit as an example. I have seen a move more towards lenders requesting accountants' references to evidence self-employed income. From my experience this has made the process in some scenarios much simpler with a higher success rate.
Star Quote
Copy

Editor
Darryl Dhoffer
Founder at The Mortgage Geezer
If you're self-employed and dreaming of owning a home, buckle up because it’s like trying to explain quantum physics to your cat. Lenders are all, 'Oh, you're self-employed? Great! Let's see... your tax returns from the year before last, and the year before that. But hey, don't worry. If you've been a wage slave for a year and are about to jump ship for a new job, they're all over it like a cat on a laser pointer. It's like, 'You're new, you're untested, you're a total gamble! We're totally in!' Logic? Who needs it?"
Star Quote
Copy

Editor
Justin Moy
Managing Director at EHF Mortgages
Striking the right balance on declared income is the single biggest mortgage issue to overcome for the self-employed. Accountants will naturally look to make a business owner pay as little tax as possible, whereas for mortgage purposes we will need to see a much higher level of declared income. There are some lenders happy to look at the profit of the business rather than any personally declared income of the business owner, and a few will look at the last year in isolation to help with affordability. But you cannot have low declared income but still expect to borrow huge amounts you feel are affordable. Technically, it shouldn’t be any harder to obtain a mortgage if you are self-employed or contracting. The main issues tend to revolve around how profit and income are distributed.
Copy

Editor
Michelle Lawson
Director at Lawson Financial
Problems usually arise for the self-employed when borrowers fail to take the appropriate advice around their situation. There are multiple options for anyone not falling under the PAYE banner but each lender is different in their offering. The statement of it being harder is around perception and those in the non-PAYE sector should definitely not go it alone when wanting a mortgage. They should seek advice from a suitably qualified and experienced broker to ensure they get the right loan.
Copy

Editor
Rohit Kohli
Director at The Mortgage Stop
There are two main issues for non-PAYE borrowers. The first is their tax position. Often accountants look for ways to minimise tax liability but this can mean the income we can use for mortgage applications isn’t quite enough. For example, when lump sums are paid into pensions. Secondly there is the mountain of paperwork: lenders often ask for much more paperwork such as two or more years' tax records and months' worth of bank statements. Any issues with any of this usually gets a decline from lenders. So if you're self-employed, speak to a broker with plenty of time ahead when applying for a mortgage and get organised.
Copy

Editor
Adam Stiles
Managing Director at Helix Financial Partners
Lenders will usually go off the average of the last two years' income if the figures are rising, or latest if the income is decreasing. By income, we mean profit from self-employment if a sole trader, profit / drawings from partnership if in an LLP, or salary and dividends or salary and net profit if from a limited company and your shareholdings are 15%-25%+ (depends on the lender). There is a small pool of lenders who can go off one year's figures. A lot of lenders have different rules. Some rules work more in favour of certain borrowers than others depending on the circumstances, which is why professional advice and assistance can make the process much smoother and less stressful.
Copy

Editor
Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
We deal with a lot of mortgages for the self-employed and limited company directors. Some lenders have lower income multiples and loan-to-value ratios that they will apply to those that are not paid through PAYE which is something to look out for, even if there is a second applicant who is paid through PAYE. Lenders are looking for consistency of income, with a track record of at least two years. Where there's been a big decrease in profit (or even an increase) lenders will want to understand the background to this. They will also look at the industry/sector the applicant operates in. This was much more prevalent during Covid, but even now lenders can take a more cautious view of certain sectors. Things like pension contributions and other one-off expenses for a business can also impact the profit levels but some lenders will be willing to add this back in to show a true reflection of the business performance and lend based on what it would have looked like.
Copy

Editor
David Stirling
Independent Financial Advisor at Mint Wealth
Assessing self-employed income continues to be problematic and lenders often treat things differently. HSBC for instance will use a director's share of profits, while other mainstream lenders will often use an average of 2-3 years' figures. These can result in massively different affordability calculations for borrowers. For a self-employed borrower we would advise trying to get a couple of strong years' accounts, preferably with little variation. A large increase or decrease in the most recent year will lead to extra questions from the lender to assess plausability of the application, with an often unpredictable affordability calculation.
Copy

Editor
Craig Fish
Director at Lodestone Mortgages
The self-employed, limited company directors, contractors and LLP partners tend to have one thing in common and that is that they typically employ the services of accountants to mitigate tax but then fall foul of a few things, from lender criteria or the amount of income available. We deal with a lot of non-PAYE borrowers and the key to avoiding disappointment is using a broker with specialist knowledge of this area of the market.
Copy

Editor
Ken James
Director at Contractor Mortgage Services
Welcome to self-employed mortgage mayhem. Is it harder to get a mortgage as a self-employed person? Yes, it can be. Lenders ask very little from the employed to prove their income, typically the latest 3 months' payslips. Compare this to the self-employed limited business or sole trader, and most lenders want the latest 2 years' income figures, could ask for different proofs of income, accountants' references or Tax calculations and Tax year overviews also known as SA302's, and maybe full audited accounts. All of this adds complexity to the application. If borrowers do not have the right mortgage broker who understands self-employed criteria they can get bogged down in the whole process. To have a better chance of success ensure you have the right broker, namely one who has experience of the self-employed market. They will know straight away if the case will fit and where, and which lender would best suit a client, reducing the risk of a failed application.
Copy

Platinum
Elliott Culley
Director at Switch Mortgage Finance
Unfortunatley it is harder to obtain a mortgage if you are not on a standard PAYE employed contract. Most lenders assessment of your income also means you end up in a position where you can borrow less money than someone who is employed on a lower salary. Most self employed borrowers expect to borrow a figure based on current income, but this is not the way it works for most lenders and I imagine this would make up a substantial amount of the applications that have been rejected in the past. The current landscape is tipped in favour of applicants who are employed so in my opinion it is vital to use a mortgage broker if you want to be successful with your application if you are self employed. Lenders assess self emplyed income differently and one lender could be much better for you than others, so its worth taking the time to assess your options.
Copy

Graham Cox
Director at Bridging Hub
Some lenders just seem to favour employed applicants over self-employed. For example you may be able to borrow at a higher Loan to Income. And you may need as little as 1 months payslip if employed, whereas most lenders require 2 years trading history for a self-employed applicant, though a few work with 1 year. But the tide is slowly turning and there are plenty of options out there. Company directors, for example, don't have to load up their dividends as it's possible to use share of net profit plus salary. A few lenders allow share of pre-tax net profit plus salary with just one year's accounts, which can really boost affordability.