Self-Employed 1 Year Accounts

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Self-Employed 1 Year Accounts

Self-Employed 1 Year Accounts

James Best joins us to talk about mortgages for the self-employed who only have one year of accounts..

What are the requirements for getting a mortgage as a self-employed individual with only one year of accounts?

Ideally, you need to have one whole year of trading, from start to finish. A partial year, or starting part way through a tax year usually isn’t enough.

You need a whole financial year in the business, from taking that first step into self-employment. If you’re changing your business from sole trader to limited company, lenders may make an exception – lenders will look for a track history and experience within your industry.

Let’s say you were a plumber operating as a sole trader for a few years and you went to a limited company. That’s absolutely fine. Or, perhaps you were employed in the industry as a plumber and decided to do it on your own as self-employed. If you’ve got a three year track history in the same industry, lenders will consider you with one year’s worth of books.

Having an accountant that can support your figures in a statement or provide a projection for the following year can also help with getting your application agreed.

We get lots of enquiries from clients that have completed their first year and have the perception that it’s going to be difficult or they can’t do it. But in reality, this is what we do day in, day out.

What is acceptable proof of income for a self-employed mortgage applicant with one year of accounts?

We’d need one full year’s worth of accounts. For people in a partnership or sole traders, we look at self-assessment documents – your tax calculations which you can get via HMRC. You’ll need a corresponding tax year overview to show your income from self-employment.

If it’s a limited company, we need a bit more information to get your income. You could still do your personal self-assessment if you’ve got a full tax year in the business. That shows the income you’ve taken from the business.

Or, you would need one full year’s worth of finalised limited company accounts. If you are limited, having an accountant that the lender can contact will greatly help with the processing of your application.

Lenders will also be looking at in detail your latest three months’ business bank statements. They want to see the current health of the business – what’s coming in and going out. That gives them a more immediate snapshot than your records of a year that perhaps finished several months ago.

Can people with one year’s accounts access the same mortgage products as those with longer records?

There aren’t any products that would exclude you through being self-employed. Some mortgage products are First Time Buyer only or are very niche specialist schemes, but typically the products are pretty similar.

Because we’re whole-of-market, one or two lenders we work with do have bespoke products for the self-employed with one year’s books, but that’s quite rare. With the lenders that can consider these types of cases, you would get the same interest rate as if you were employed.

What steps can someone take to increase their chances of securing a mortgage with one year of accounts?

If possible, try to make the accounts look as good as they can. A good turnover in your business and a good level of profit, where the drawings you’re taking out from your business don’t exceed that profit, will all work in your favour.

Your accounts need to be supported by three months’ business bank statements as well. Ideally the turnover on those statements will be similar or higher than the turnover for the previous year.

That shows that the business has continued in the same way that the accounts suggest. It gives mortgage underwriters peace of mind that the business is continuing to trade at the same level.

If you’re a limited company and you’ve got an accountant on board, it helps if they can provide a cover letter about the business, with a bit of history and some projections. Perhaps your business has some big contracts coming up or you’re due to be paid from some big jobs that are going through. This all helps demonstrate why the lender should accept your application.

How do lenders assess the affordability of a mortgage for our self-employed individuals?

They typically look at the profit that the business generates after expenses. For the majority of self-employed individuals that’s on the self-assessment documents. They want to see that the business is trading effectively.

It’s looked at the same way if you have one year’s books or if you have two or three. Lenders either take an average or use the most recent figure.

Are self-certification mortgages available for self-employed individuals with only one year of accounts?

No. People with one year’s accounts are typically outside of the norm now for lenders. Almost all mortgage lenders will lend to self-employed individuals if they’ve been trading for two or three years.

If you only have one year’s accounts, it increases a lender’s risk, so they want to fully underwrite and check all the documentation. There aren’t any self certification mortgages for the self-employed with a year’s accounts, I’m afraid.

What interest rates can someone expect as a self-employed mortgage applicant with one year of accounts?

Not all mortgage lenders will accept one year’s accounts. So the number of lenders will be restricted. You’ll get the same interest rate from those lenders as if you had two years’ accounts, or if you were employed, but by restricting your pool of lenders, you may not get the best deal out there. It’s a niche situation.

Everybody wants to pay the least amount they can, but it’s all done on the basis of risk to the lender. They look at the type of application and what makes it unusual. You’ve got to accept the fact that with one year’s worth of books, even if you have many years experience, your risk is outside a lender’s comfort zone.

You may have to pay a little bit more. But the good news is that high street lenders do these types of mortgages. So it’s not necessarily a mortgage from someone you’ve never heard of, whose rates are really high. You could get a competitive rate.

Speak To an Expert

Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker. 

Are there any specific mortgage lenders or financial institutions that specialise in mortgages for self-employed individuals?

There are lenders that are better at doing it, and better equipped, but there are none that only do mortgages with one year’s books. That’s why speaking to a mortgage professional who is fully qualified and has access to the whole market is really important.

We know which lenders are the best to deal with these cases. The lenders that are very good at cases with one year’s accounts have the best underwriters and the ability to step away from the computerised process. A person is looking at the case specifically to make a personalised decision. A lot of lenders do one year’s worth of books, so it’s just about knowing which ones to approach for your specific case.

Are there additional criteria considerations for self-employed individuals with one year’s accounts?
If you’ve got a track history in the same industry, that’s a good tick in the box – lenders look for that straight away. If you know things are changing and you’re looking at getting a mortgage, that’s something to be aware of.

If you’ve got a good deposit, the risk is lower for the lender so the higher their appetite to lend to you is. If your credit score is good, you’ve kept payments up-to-date and all the information is correct, plus you’re on the electoral roll, that all works in your favour. That’s quite a simple thing that everyone can do.

Generally, the more information you’re able to provide your broker, the better chance we have of understanding your business, putting your case forward and getting it accepted.

The worst outcome is that we take up each other’s time going through it all and there isn’t anything that we can do at this stage. This does happen from time to time. But in that situation, we’ll explain what to do and confirm a timeline to get into a position to get a mortgage. So the worst case scenario is you get a roadmap for what you need to do.

That’s what the advice process is all about. Speak to a broker, and they’ll be able to help you out.

How long does the mortgage application process take for someone who’s self-employed with one year’s accounts?

All brokers and lenders work differently, but typically if we’ve got all the information upfront and all the documents, it won’t take any longer than usual to go through.

But because we’re looking outside of a lender’s comfort zone they are likely to ask more questions and perhaps request more documents. So that part of the process may take a little bit longer.

Having all the documents ahead of time and speaking to someone who knows the lenders’ policy and what the underwriters are going to ask, you should have the same smooth journey as everybody else.

Is it beneficial to work with a mortgage advisor when applying for a mortgage as a self-employed individual with one year’s accounts?

Absolutely. It’s all about building a picture of your business, with expert knowledge of the mortgage market and the most suitable lender. Without those things, looking at it on your own you could do it – but you’re going to have a hard time. You’re not going to know whether the choice you’ve made is the right one.

We always advocate speaking to a mortgage professional for advice and guidance. But if you only have a year’s accounts you’re going to struggle without it. So save yourself some time and a big headache – go to a broker and they’ll be able to help you out with it all.

Can I get a joint mortgage with a partner who has a regular income if I’m self-employed with one year’s accounts?

Yes, and this scenario is actually better than a sole application from a self-employed individual with one year’s books. That’s because the application isn’t wholly reliant on one year’s self-employed income. Both people will be assessed for the application, and if one is employed with a stable income, that will be very beneficial.

The underwriter will have peace of mind if one stream of income on the application is from permanent employment. You’re still going to be restricted in the lenders that will accept one year’s worth of accounts, but the application is less risky to them.

Are there any specific challenges or risks that self-employed individuals face when applying for a mortgage with one year’s accounts?

A typically wants two years or three years worth of self-employment history. Those figures show that the business is established and trading its performance record. With just a year’s books, it’s not the same.

So underwriters have to look at it retrospectively. What has this individual done beforehand? Having a track history is fantastic, but it can still be a challenge.

Another thing to consider is when your first year finished. Imagine the end of your business year was in December, you have figures for the first year and we’re now in spring. You’d have three months worth of business bank statements from the next financial year – so you can establish an onward trend for the underwriters.

The main challenge for self-employed people is that lenders tend to only take income that you pay tax on. If you’re self-employed with an accountant, you want to run your business as tax efficiently as possible.

These two things are diametrically opposite to each other. That’s why it’s best to talk not only to an accountant but also an advisor to make sure that you’re getting the best advice there.

What happens if my one-year accounts show low or fluctuating income? Can I still qualify for a mortgage?

The lender will only be able to lend based on the income you take. They need to make sure that the mortgage is affordable for you over the whole term and you won’t enter financial difficulty.

Having a low income on your self-employed books doesn’t necessarily mean that you can’t get a mortgage, but the level of mortgage is likely to be lower.

With fluctuating income, lenders look at the whole year. So if your work is seasonal, it doesn’t necessarily matter that much. If anything, that can work in your favour – it’s like looking at an employed person’s P60 rather than three months’ wage slips.

Again, when we’re looking at business bank statements and it’s a quiet time of year we will provide context for the story. Perhaps your work is better in the summer and this time of year is quieter – it’s about building that picture and providing statements from the busy time to prove that. By knowing the nature of your business, we can explain it to the underwriters and get your mortgage accepted.

What impact does credit history have on the mortgage application process for self-employed individuals with one year’s accounts?

It’s the same as for everybody else. The better the score, the higher your chances are. Things that might cause a lender concern on your credit report can be missed payments or defaults. If those things aren’t on your credit report lenders are going to look at the application a lot more favourably.

If you do have credit issues, again we’re looking at something outside of the norm. If a case is more risky, underwriters ask more questions. In this situation, it can have a more of an impact on our ability to get a mortgage with a year’s books.

We’re already getting a lender to make an exception to the norm – with a year’s worth of books – and if we’ve then got another exception on the credit score, it makes that process a lot harder. It doesn’t make it impossible, though. Again, that’s where getting information up front and speaking to a mortgage advisor will let you know what your options are.

Are there any government schemes or support available for self-employed individuals with one year’s accounts?

I don’t believe there are. But the other schemes available are open to the self-employed just as they are to the employed. You’re not excluded from any schemes.

There aren’t that many schemes at the moment, unfortunately. It’s not about being self-employed, It’s just there aren’t many out there.

Are there any alternatives to traditional mortgages for self-employed individuals with one year’s accounts?

Not that I’m aware of. It’ll just be the same as for everybody else. There’s no exclusive funding for people that are self-employed. You’re able to get traditional mortgages – that’s what we do, day in, day out.

Can I use additional sources of income when applying for a mortgage as a self-employed individual with one year’s accounts?

No incomes are excluded for people that are self-employed with one year’s accounts. Any income will be included the same way as if you had two or more years’ accounts or if you were employed. All income streams are available.

If you do have different income streams, such as profit from rental property or dividends, speak to a mortgage professional. Not all mortgage lenders accept income from rental properties. Not all of them look at dividends – they look at other areas of profit from the business.

A mortgage professional will know which lenders accept certain types of income and at what level. Some might take just 50% of income from rent while another lender may accept 100%, which could mean that you can borrow more for a better property.

Is it possible to make overpayments or pay off a mortgage earlier as a self-employed individual with one year’s accounts?

Yes, it’s exactly the same as for everybody else. Most of the mortgages we do have a facility where you can overpay. That’s where you pay more in addition to your monthly mortgage payments. You typically get an allowance each year.

However, with lots of mortgages, if you’re looking at paying off big lump sums or paying it off in full, early repayment penalties will apply.

That’s why it’s really important to speak to a qualified mortgage professional. By understanding your circumstances, we recommend the most suitable type of mortgage with those features. We make sure that if you’re looking to overpay in future, we’re able to cover that.

What else do we need to know about self-employed mortgages with one year’s accounts?

Right now, we’re coming up to the end of the tax year. It’s a common time for self-employed people to look at their books and their income. Pick up the phone and speak to a mortgage broker or get in touch. While you’re going through your books and your accounts we can help understand what it means within a mortgage context.

By doing your accounts in a certain way or having your income at a certain level, you could potentially get a more suitable mortgage. It’s all about giving you the right information when you need it.

We’re the opposite to an accountant. While they will do a really good job in making sure your business is performing as well as possible, if you’re looking at getting a mortgage there may be other things to consider. Speak to both of us – while they’ll tell you their side, we can tell you ours.

Ultimately, that can help you form the best decision for your onward plans, if you are looking at moving or getting a mortgage.