Self-employed workers could soon find it easier to take out a mortgage, under changes to lending rules currently being considered by the Financial Conduct Authority (FCA).
The proposals form part of a wider review aimed at improving access to home ownership and remortgaging for groups that have traditionally found borrowing more challenging, including the self-employed, older people and first-time buyers.
There are more than 4.57m self-employed people in the UK, according to latest data from the Office for National Statistics, many of whom may struggle to take out a mortgage if they don’t have a consistent income.
If you are self-employed and looking to buy or remortgage, ensuring your financial records are up to date can help boost your chances of your application being accepted.
What paperwork do you need?
Most mortgage lenders will ask for proof of earnings covering the previous two to three years, although some may consider applications based on just one year's trading history.
Depending on how your business is structured, the evidence you may be asked for could include:
• Company accounts
• Self-assessment tax calculations (SA302s)
• A certificate from your accountant confirming your income levels.
It's important that this documentation is current, as many lenders require the most recent year-end accounts or tax records and may reject paperwork that is more than 18 months old.
The way income is assessed can also vary. For example, if you’re a director of a limited company, lenders may look at both your salary and any dividend payments when calculating affordability. Freelancers and sole traders, however, typically will be assessed based on their average income over the past two or more years.
Alongside proof of income, applicants should ensure they have other key documents readily available. These usually include:
• Proof of your identity (such as a passport or driving licence)
• Proof of address (usually a utility bill or council tax statement)
• Recent bank statements (covering the last three months)
Checking that your credit report is accurate and up to date before applying can also help avoid delays or unexpected issues during the underwriting process.
The gradual rollout of Making Tax Digital could help simplify the mortgage application process for self-employed borrowers. Lenders are still expected to assess affordability based on net profits and overall income, but digital tax reporting should make it easier to provide up-to-date financial information, improving transparency for both borrowers and lenders.
