Self-employed twice as likely to be rejected for a mortgage: Here’s how to get accepted

Self-employed people are twice as likely to be rejected for a mortgage than salaried employees, new research from specialist home loan provider The Mortgage Lender has shown.

It said nearly one quarter of self-employed individuals had had a mortgage application denied in the past, compared to just 12 per cent of salaried workers.

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.

Tricky: Many self-employed workers say it is a challenge to get a mortgage from a high street bank or building society, especially if their income fluctuates

Peter Beaumont, chief executive at The Mortgage Lender said: ‘There are around 4.2million self-employed people in the UK, and it is typical for that number to grow when coming out of a recession, or in this case a pandemic also.

‘While it may offer those workers more freedom, the major drawback of self-employment is the perception of income inconsistency, and consequently a greater challenge when it comes to borrowing large sums of money.’

Whilst 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.

David Hollingworth, associate director at mortgage broker, L&C Mortgages says: ‘Whilst an employed borrower will typically have a regular basic salary that’s easy to demonstrate with payslips, self-employed workers may have more fluctuation in their month-to-month income.

‘In order to get an overall picture of their income, lenders will typically require a two year track record, in some cases three years, of income demonstrated through self assessment or accounts.

‘That therefore will make things more difficult for the self-employed especially where they have gone self-employed more recently.

‘Some lenders may be able to consider one year in the right circumstances but most lenders will expect the two year minimum.’

What other barriers are the self-employed up against? 

During the pandemic some self-employed workers saw their income reduce, and this resulted in lenders carrying out stricter checks to ensure that mortgages would be affordable.

Lenders such as HSBC, Metro and TSB required evidence that a person’s business had recovered from the pandemic.

In some cases, lenders were demanding higher deposits or equity from self-employed workers – and some major lenders still have limitations in place.

For example, Nationwide will only offer up to 85 per cent of the property value for self-employed applicants, and Santander restricts this to 75 per cent.

Lower limits: Self-employed applicants may not be able to get as big a mortgage as their salaried counterparts, as lenders often impose tougher restrictions

Lower limits: Self-employed applicants may not be able to get as big a mortgage as their salaried counterparts, as lenders often impose tougher restrictions 

For salaried employees it is possible to borrow up to 95 per cent of a property’s value with both lenders under the right circumstances.

However, some lenders have withdrawn the limits that were in place on self-employed workers during the peak of the pandemic.

For example, TSB is now offering mortgages covering up to 95 per cent of a property’s value and will lend as much as 5 times a self-employed person’s annual income. 

How can they get approved for a mortgage? 

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

Ten tips to boost your credit rating

1) Register on the electoral roll at your current address

2) Use a credit card responsibly, and always try to retain a good amount of available credit

3) Check your credit report regularly and ask for any errors to be corrected

4) Never withdraw cash from your credit card

5) Limit applications for new credit

6) If you have bad credit, stop applying for more

7) If you don’t have a credit card, get one: but make sure you pay it off monthly

8) Don’t miss repayments

9) Let your credit history mature

10) Don’t keep unused cards

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

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

They may 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.  

Hollingworth says: ‘Self-employed workers should look at the mainstream market where their situation will allow as that is likely to yield the cheapest rates.

‘Using an adviser should help to target the right lender especially where income and track record may be more complex.

‘Having the right paperwork to hand and ensuring it’s up to date will be a key factor in determining the right option and will also help with the speed of processing of the application.

‘Not providing the requested paperwork will only hold things up and could result in lots of back and forth as the underwriter poses more questions.

‘Other more specialist lenders may also be an option especially if there is less track record or there have been blips along the way.

‘The rates are likely to be higher but it may offer an option if the mainstream lenders can’t take it on.’

It’s also wise to check your credit file through an agency such as Experian or Equifax, making sure you 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.

Best mortgage rates and how to find them

Finding a mortgage can seem confusing due to the huge range of deals on offer.

This is Money has partnered with independent fee-free mortgage broker L&C, to help you find the right home loan.

Our mortgage calculator can let you filter deals to see which ones suit your home’s value and level of deposit.

You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and even ten-year fixes, with monthly and total costs shown.

Use the tool at the link below to compare the best deals, factoring in both fees and rates. 

> Compare the best mortgage deals available now