Understanding the breadth of mortgage options available to self-employed applicants

Recent figures from the Office of National Statistics have revealed that there are 154,000 more self-employed than this time last year. In total, there are now 4.4 million self-employed people working in the UK. The data also showed a significant rise in the number of women choosing to work for themselves, with an additional 93,000 self-employed women compared to the same time last year.

With over 4 million self-employed people in the UK – there is clearly a huge opportunity for brokers. Self-employment is not for everyone and comes with many features PAYE borrowers do not need to consider. Irregular income and in many older borrower instances complex income, all feature. But the view that self-employed borrowers are in some way riskier is misplaced. More complex – yes, but not riskier if you understand the individual borrower’s circumstances and have the evidence to support the application.

The other interesting point is that in an ageing population, almost half of all self-employed working people (48%) in the UK are aged 50 and over, according to ONS data analysed by the over-50s digital community, Rest Less, who found the proportion of over 50s becoming self-employed has grown year-on-year for the last decade, despite the Covid-19 pandemic. The proportion of workers under 50 has been in steady decline over the same period, falling from almost 60% in 2021, to 52% in 2022.

The moral of this story is that self-employed is a label that covers many different types of borrowers. The only thing they often have in common is that they are not PAYE. After that they are as individual in their appetites, success, and personal circumstances as any other group of individuals.

The market has however been typically underserved because it is complex. Equally, the experience of many self-employed people has been one of rejection- not always for good reason – leaving many with the impression that they cannot get a mortgage. And of course, they tell their self-employed friends and the perception spirals. The industry has not always been at its best when it comes to the self-employed market.

Proof points are the bedrock of underwriting and for self-employed borrowers this is no different. In general terms, lenders and underwriters want to see evidence that earnings are as they appear to be. The evidence may take the shape of company accounts to determine types of income (dividend and salary) or how a lender might view net profit, ownership structures and control of the business, and accountants’ verification or use of tax forms (SA302).

While there is room for improvement, there is also progress. We cannot speak for everyone but for self-employed borrowers we will accept 2 years' accounts or SA302 and tax year overview for the latest 2 years depending on self-employment type or 1 year's accounts or SA302 and tax year overview where trading period less than 2 years. Equally, for limited companies, last year’s net profit after tax is considered if 100% shareholders are on the mortgage (though we will also need the last 2 years’ accounts to show stable or improving business profile). We can also accept self-employed contractors or those under an umbrella company structure and accept Day 1 contractors with a minimum of 1 year’s track record within the same line of work.

You may already be thinking all these different approaches appear complex, but they exist to cater for the many different types of borrowers that we encounter. It is the tip of the iceberg and there are many other elements a lender such as ourselves will take into consideration. Not least, we consider workers in construction receiving variable and/or cash payments including CIS and those who have zero hours contract with a good track record, second jobs and variable income as well as recent freelancers with a track record in a similar role. But ultimately any lender’s criteria for self-employed needs to take the individual circumstances of the business owner into account.

Good communication between lenders and the brokers is essential in getting the right decision swiftly. Self-employment is a broad church that is a way of living for young and old alike.

Laura – self-employed first-time buyer

Laura has been self-employed since she set up her hairdressing business 18 months ago. She’s been worrying about her chances of getting a mortgage as a first-time buyer, having been self-employed under 2 years. She had already been told by a couple of high-street lenders that she would need at least 3 years’ worth of accounts.

A lender like Vida will consider Laura – we can accept 1 year’s accounts or SA302 and tax year overview where the trading period is less than 2 years, like Laura’s business of 18 months. (Subject to full underwrite, satisfactory evidence required of income requirements and sustainability.)