Getting a mortgage at the moment if you are self employed can be quite difficult since lenders have tightened their criteria for self employed applicants due to the pandemic. However, the hope is as the economy picks up and things start getting back to ‘normal’, then hopefully they will start to relax their criteria again.

However, if you plan correctly, you still have every chance of getting a mortgage approved, even if you are self employed!

The fact is, the calculation lenders use is the same for employed and self-employed income, so if you earn £20k a year for example, whether you are employed or self-employed, if your circumstances are the same, you normally can borrow the same amount.

The difference between employed or self-employed income is what documents are needed to prove the income. For employed income it’s easy – normally 1 – 3 months of wage slips and a P60 if taking bonuses or overtime etc. into account.

For self employed income, you will need at least 1 years’ worth of accounts/tax returns, but most lenders prefer 2 years’ worth. So you need to be working for longer before you can start thinking about buying a house.

HMRC allow individuals who are self-employed to deduct many types of expenses from their turnover so that the profit they are taxed on (gross profit) is after these expenses have been taken out.

This makes being self-employed very attractive to some people as an employed person doesn’t have this option and so could potentially pay more tax than someone earning the same amount of money, but who is self-employed.

Accountants are great at helping you to deduct all the right expenses so that your business pays as little tax as possible.

However, over the years that I’ve been giving mortgage advice, there is a common theme that comes up time and time again and where a lot of people who are self-employed fall short when applying for a mortgage, is what income they take as a salary from their business!

Only the other day I was having a conversation with a client who runs a very successful business with a turnover of over £1million, however, he could only get a very small mortgage. Why you might be asking? Well, although the business turnover was over £1million, he actually only paid himself a very modest amount (about £300 a week). The rest of the turnover was used to pay for business expenses or reinvested into the business etc. This meant when he came to do his tax return, on paper he only earned approx. £15,600 a year and he wanted to borrow £200,000 and he was the main earner in the household. The fact was, he couldn’t even borrow £100,000 based on that income!

Now had he taken more income from the business so that his tax return showed a higher income (which the business could comfortably afford), he may well have been able to borrow the £200,000 he was looking for. Yes, this means he will have to pay more tax though! However, if you know in the next couple of years you are going to be looking to buy a house or need to borrow more money to renovate etc. you have to face the reality that you will need to show on your tax return an higher income in order to be able to borrow the amount you are looking for! Contrary to popular believe, you can’t have your cake and eat it too!

If you are a director of a Ltd. Company, then some lenders will take the company’s retained profit into account for affordability so this does give you some flexibility as a director if you didn’t want to take a greater income for example, but this doesn’t work for sole traders and not all lenders will take retained profit into account, so relying on retained profit will reduce the lenders available to you.

So my advice is speak with your accountant early on (at least a year before you start thinking about buying a house, but ideally longer) and discuss with them the best way to pay yourself a higher income, so that when you come to apply for a mortgage, your tax returns look more healthy and you can be more confident you can borrow the amount you are looking for.