Almost half of the self-employed struggle to get mortgages – here’s how to get accepted

Close to half of self-employed people who have applied for a mortgage in the past have had their application rejected, according to research. 

The study, carried out by The Mortgage Lender (TML), found that nearly one in ten non-PAYE workers who have applied for a mortgage have never had an application accepted.

Self-employed workers are often subjected to tougher checks, mainly because they are considered to have a more irregular or complex income and are therefore viewed as riskier by lenders. 

Of the self-employed workers within the 2,000 strong survey, sole traders were the most likely to have their application approved, with two thirds having had all their applications accepted.

Those in a partnership structure and company directors also had a high proportion of their applications approved, with over half saying all their applications had been accepted.

Workers on zero-hours contracts were the most likely to have had all their applications declined, according to TML.

In fact, almost two thirds of the gig economy and zero hours contract workers have had some or all mortgage applications declined in the past, while a similar proportion of contractors have experienced the same fate.

Why are non-PAYE workers being rejected?

Of those who have experienced mortgage rejection in the past, 30 per cent said that it was because their profession had been considered too unsteady or irregular, according to TML.

Close to 30 per cent stated it was due to the volatile nature of their income. This was most likely to be the case for limited company directors and contractors. 

Traditional professions like lawyers and accountants were also likely to have been rejected for this reason.

Other reasons for being declined on mortgage applications included low credit scores, missed or late payments, not having the necessary documentation and the lender not assessing the monthly payments as affordable.

While many mortgage lenders offer exactly the same deals to self-employed borrowers as salaried employees, it is much harder for the self-employed to prove their income.

Salaried employees typically only need to provide their latest three months of payslips, whereas self-employed workers often have to provide up to three years of tax returns and business accounts.

This can make it more challenging for someone who has recently become self-employed to access finance to either buy or remortgage a property.

Ken James, director at Contractor Mortgage Services says: ‘Lenders ask very little from the employed to prove their income, typically the latest three months payslips.

‘Compare this to the self-employed business or sole trader, most lenders want the latest two years of income figures, if you are a sole trader or a limited company. 

‘Lenders could ask for different proofs of income, accountants’ references or tax calculations and tax year overviews also known as SA302s, maybe full audited accounts.

‘All of this adds complexity to the application, if the client does not have the right mortgage broker who understands self employed criteria they can get bogged down in the whole process.’

Tax return records: Most lenders want at least two years of figures for the self employed

Mortgage brokers also warn that often self-employed people or contractors are undone by the fact they’re unable to prove they have sufficient income to cover the mortgage they require.

Justin Moy, managing director at EHF Mortgages, says: ‘The main issues come to how profit and income are distributed.

‘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. That’s the biggest issue to overcome.

‘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.’

What other issues do self-employed people face?

In some cases, lenders demand higher deposits or equity from self-employed workers.

Graham Cox, director at Bridging Hub, says: ‘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.’ 

But, Cox says the tide is slowly turning and there are now plenty of options out there.

‘Company directors, for example, don’t have to load up their dividends as it’s possible to use the share of net profit plus salary,’ he adds.

‘A few lenders allow the share of pre-tax net profit plus salary with just one year’s accounts, which can really boost affordability.’

Non-PAYE workers may also find smaller mortgage lenders more amenable than big high-street banks, as these tend to be more flexible when it comes to considering individual circumstances. However, they usually charge higher rates.

‘While many high street banks are happy to take the big fees from business banking, they’re less interested in the complexity and risk that comes with actually lending to non-PAYE workers personally,’ says Peter Dockar, chief commercial officer at Gen H.

PAYE bias: Of those rejected 30 per cent say their profession had been considered unsteady

Since the onset of Covid-19, lenders have not revised their self-employed criteria, according to Chris Sykes, technical director at mortgage broker Private Finance. 

During the pandemic, recognising the challenges businesses faced, lenders began requesting the last three months of business bank statements. 

This was not only to identify any government support received but also to assess the sustainability of businesses in a post-pandemic economy comparing inflows to previous turnovers.

‘The issue is that many lenders have retained this requirement,’ says Sykes, ‘which can be problematic for some business owners for security and retrieving the required information in time. 

‘For instance, I recently encountered a company owner with a sub-50 per cent shareholding in a business that turns over £30million annually. 

‘This owner struggles to access the bank statements, as a dedicated finance team manages day-to-day operations. 

‘Additionally, there were concerns about disclosing trade partners in their unique sector of their industry.’

What should the self-employed do to get mortgages? 

Firstly, checking their credit file through an agency such as Experian or Equifax and making sure they have no errors or issues that might lead a lender to reject an application.

A credit report shows a list of a person’s credit accounts, such as bank accounts, credit cards, utilities and mortgages. It will also display their repayment history, including late or missing payments.

When a person applies for a loan or mortgage, the lender will look at their credit report on top of their proof of income and bank statements.

For those not requiring a mortgage immediately, ensuring they have built up a decent rack record of profits will stand them in good stead, according to David Stirling, an independent financial advisor at Mint Mortgages & Protection.

‘For a self-employed borrower we would advise trying to get a couple of strong years accounts, preferably with little variation,’ says Stirling

‘A large increase or decrease in the most recent year will lead to extra questions from the lender to assess plausibility of the application, with an often unpredictable affordability calculation.’

Using a mortgage broker is a sensible place to start, and there are now a large number of free online mortgage intermediaries, if cost is a concern.

Like with any other broker, they are paid a commission by lenders but this won’t impact either the rate or any upfront fee you pay.

Michelle Lawson, director at Lawson Financial. says: ‘Mortgage rejection is more to do with some borrowers not taking 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 the non-PAYE sector should definitely not go it alone when wanting a mortgage and should seek advice from a suitably qualified and experienced broker to ensure correct placement.’

Self-employed workers are also typically subjected to longer wait times and more rigorous checks, so having all the necessary documentation ready in advance will help save time and make the process less painful. 

Rohit Kohil, director at The Mortgage Stop, says: ‘Lenders often ask for much more paperwork, such as two or more years of tax records and months worth of bank statements. Any issues with any of this usually gets a decline from lenders. 

‘So if you are self-employed, speak to a broker in plenty of time ahead of applying for a mortgage and get organised.’