Self-Employed Mortgage With 1 Year’s Accounts
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Mortgages For Professionals with complex incomes through the main high street lenders
High street lenders typically provide more appealing rates, making them the preferred choice for many professionals seeking mortgage solutions. However, navigating the complexities of professional incomes can present challenges in securing loans from these lenders.
Professionals often assume they must seek alternative lenders due to the intricacies of their income streams. Yet, armed with a deep understanding of various payment structures, we confidently facilitate successful mortgage applications with high street lenders.
In fact, a substantial 93.4% of our mortgage applications are seamlessly processed through reputable high street lenders, showcasing our expertise in navigating complex income scenarios.
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Peter Stokes
Director
I am an expert in: Self-Employed Mortgage With 1 Year’s Accounts
CIB level 3 in Mortgage Advice & Practice
Self-Employed Mortgage With 1 Year’s Accounts
At Davidson Deem, we know that being self-employed brings freedom, but it can also make getting a mortgage feel a little trickier, especially if you have only been trading for a year. Many people assume you need at least two or three years of accounts to buy a home, but this is not always the case.
In our guide below, Peter Stokes answers common questions about securing a mortgage with just twelve months of trading history. You will learn which lenders can help, what size deposit you might need, how your income is worked out and what documents are required so you can feel confident when applying.
Can you actually get a mortgage with only one year of self-employed accounts?
Yes, it is possible to get a mortgage with only one year of self-employed accounts. Some lenders require two years of figures, and sometimes even three.
There are a couple of high street options that can assist you with only one year’s worth of figures by looking at it slightly differently.
Provided you fit all the rest of the lender’s criteria, having only one year of accounts shouldn’t preclude you from getting a mortgage.
Which lenders are willing to consider just one year’s trading history for self-employed applicants?
A number of lenders may be able to assess this in various ways, depending on their individual criteria. Halifax and HSBC are the obvious two that will look at your first year’s trading figures. One is more generous than the other in the way that they review those.
There are also a couple of other interesting options that might work by looking at your latest year’s figures rather than your first year’s. However, it is quite complicated to get those lenders to do this.
I would suggest going through a broker to access those lenders with that kind of underwriting. It may sound obvious, but this is not a straightforward application process.
What kind of deposit do you typically need if you’ve only been self-employed for a year?
In theory, the deposit requirements are the same as for any other employed applicant or self-employed applicant with more than one year’s trading history. However, when a lender is assessing an application based on only one year’s accounts, they may view it as carrying greater risk.
A larger deposit reduces that risk because it lowers the amount the lender needs to lend relative to the property’s value. While it is possible to secure a mortgage with a 5% deposit, having a larger deposit is likely to strengthen your application.
If you are applying with only one year’s accounts and a 5% deposit, lenders are likely to assess your application more cautiously. Although a larger deposit may not change the lender’s minimum requirements, it can improve your chances of being approved.
How do lenders calculate your income when you only have one year of accounts to show?
How lenders calculate your income with only one year of accounts depends entirely on the provider we choose.
Some lenders will simply take your single year of figures and use that amount within their affordability calculator or income multiple, such as four and a half or five times your income. They will probably ask questions about how your second year is going and need to know that your level of income is sustainable.
Other lenders are less flexible and assess applications as though two years of financial figures are available, even if you have only been trading for one year. For example, if your first year’s income is £50,000, they may treat your second year as £0 and calculate an average income of £25,000. They then base their affordability assessment on that £25,000 figure. This approach can still work if an income of £25,000 is enough to support the mortgage amount you are applying for.
Despite only having one year of accounts, lenders still look at this in the same way as any normal self-employed application. For a sole trader, this is your profit before tax and for a partnership, it is your share of the profit before tax. As a limited company director, it will generally be the salary and dividends you have taken from the company.
While I know some lenders will examine the overall profits of the company, lenders that work off one year do not tend to do that. They will see what you have taken.
Does it matter whether your one year of accounts shows income as a sole trader, partnership, or limited company?
No, often it does not really matter. Lenders group together sole traders, partnerships and limited companies as self-employed.
The figure brought forward is technically distinct, whether it is profit, a share of profit, or salary and dividends. However, lenders usually assess all three types of self-employed applicants in the same way, so there is not too much difference in how your application is treated.
You will need your one year of accounts to show your income, and that income, as mentioned, can be categorised in several ways. Lenders will use those accounts, or your tax calculations and tax year overviews, which were formerly SA302s.
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What if your first year’s accounts show a loss or very low profit – can you still get a mortgage?
That is going to be extremely difficult. Lenders are already taking a risk by accepting just one year of figures. If those figures are low and you argue that this year will be higher because your business was getting started, that would be pushing it too far.
You would need to have your second year of figures to see that higher income. I am not saying it is impossible. There may be unique cases where we can speak to fringe lenders who will listen and might make it work.
That would be handled on a case-by-case basis. High street lenders are certainly not going to start making allowances for those first year figures if they are low or loss-making.
Are the interest rates higher if you’re applying with just one year’s accounts?
No, not overall. The high street lenders we look to use do not produce a separate set of rates for self-employed applicants with one year of accounts.
Once they deem you a creditworthy risk and are happy with your income, we select the same rate an employed person or someone with three years of accounts would get. This applies as long as the mortgage is affordable.
Working from a limited number of lenders means you could miss out on a mortgage deal that better suits your circumstances. No lender remains at the top all year round.
The range of rates across the high street is not that big a difference, so you will not be penalised greatly. Ultimately, that is more of a timing issue than a circumstance issue.
What documents do you need to provide beyond the one year of accounts themselves?
Lenders who look at one year of accounts tend to dig a little deeper. If you run a separate business account, they will want to see those statements. In addition to the accounts, lenders often want to see your tax calculation and tax year overview.
Beyond that, you will need to provide all the normal paperwork such as your ID, bank statements, and proof of deposit. They will also look at how your current year is going, via bank statements or perhaps an accountant’s letter, just to get a feeling of safety more than anything else.
Can you use prior employment income alongside one year’s self-employed accounts to strengthen your application?
Overall, the answer is no, but there are circumstances where it can be done. I recently had a case where someone was employed by a company and then moved to a self-employed role, but remained contracted to that exact same company. It was a continuation of doing the exact same hours and role, and we have one or two lenders that will look at that as an exception.
Day rate contractors are another example where this approach can sometimes work. You may have been doing the same line of work and then moved to a self-employed basis on a daily rate contract.
However, if you have moved from employment into a new business in a completely different field and have only one year of accounts, your previous employment income is unlikely to carry any weight. Lenders will generally view it as unrelated to your current business and will not take it into account when assessing your application.
How does the timing of your accounts matter – do they need to be recent or can they cover any 12-month period?
More often than not, the timing does not have a major effect. If your accounts are more recent, you could argue they are up to date, which is a good thing. The downside is that, because the accounts are still relatively recent, there is limited evidence of how the current year is progressing.
If your accounting period finished nine months ago, you have a full year’s set of accounts along with an additional nine months of trading history to demonstrate how the business has performed since. That extra context can be valuable to a lender when assessing your application. From that perspective, the exact timing of your accounts does not usually have a significant impact.
The key consideration is that lenders will not rely on accounts that are more than 18 months old.
If you have completed your second year of trading but have not yet prepared the accounts, we would recommend getting them done, as having a second year’s figures can significantly increase the number of lenders available to you.
Beyond that 18-month time frame, whether you have only just completed your accounting year or are several months beyond, it typically makes very little difference.
Summary:
It is entirely possible to get a mortgage with only one year of self-employed accounts, and our team can help you navigate the lender options available.
While major providers like Halifax and HSBC consider single year figures, working with our advisers ensures you find the right lender and approach for your specific situation.
Key Points:
- Our advisers can help you secure a mortgage with just one year of self-employed accounts, even though your choice of lenders will be more limited.
- Major high street lenders like Halifax and HSBC are open to considering applicants with a single year of trading history.
- Although a 5% deposit is accepted by some lenders, having a larger deposit will significantly improve your chances and make lenders more comfortable.
- Lenders calculate your income using your profit before tax as a sole trader or partnership, or your salary and dividends if you are a limited company director.
- If your first year shows a low profit or a loss, getting a mortgage will be extremely difficult unless you have unique circumstances.
- Interest rates for one year self-employed applicants are generally the same as those offered to employed borrowers.
- Our team will help you gather extra documentation, including business bank statements and tax calculations, to support your application.
- Prior employment income cannot usually be used alongside your new business accounts unless you are doing the exact same role or working as a day rate contractor.
- Accounts must not be older than 18 months and completing your second year of accounts will give you access to many more lenders.
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