Mortgage with One Year’s Accounts
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Table of Contents
Mortgage with One Year’s Accounts
David Sharpstone talks all about mortgages with one year’s accounts.
CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 05/02/2024.
Can I get a mortgage with one year’s accounts?
Yes, but the options are limited. I’m not going to pretend it’s easy, as most mortgage lenders will want two years. Sometimes we have to look at more niche lenders for the self-employed.
It can be done with one year’s accounts but mortgage lenders are a bit pickier generally. They know a lot of business will fail within their first year – so having one year’s accounts is great but not the be-all and end-all. Any mortgage lender is going to want to see a bit more meat on the bones. They’ll be interested in business performance for the rest of the year – even if it’s only a third or halfway through.
How do I prove my income with one year’s accounts?
Whether you’re a limited company director or a sole trader, the same rule applies with one year’s accounts. First of all, they have to have been submitted and confirmed. There’s no point in turning up to your mortgage broker with a pile of bank statements trying to show what you’ve turned over. Your accounts must be complete and filed.
Limited company accounts have to be produced by an accountant, and sole trader accounts must be 100% complete and submitted to HMRC. The next thing that we need to look at for a sole trader is a form that used to be called an SA302 – it’s a document showing your tax calculations. It shows your accounts are 100% submitted and is usually a one or two page document that you can download from HMRC or through your accounting software. It shows the sole trader’s profit after expenses.
For a limited company director we could either look at your salary and dividends on that self-assessment, or if you’re a company director with retained profits [as covered on our limited company mortgages podcast] you can show the company accounts. These have to be signed by your accountant.
So it can be done. It does restrict the mortgage lenders quite a lot but if you’ve found the property of your dreams that ticks all the boxes you might want to take action before you have two full years’ accounts.
How much can I borrow with one year’s accounts?
This is probably the most popular question I’m asked by any new client. Every mortgage lender has their own affordability model. They will have what they call a Loan to Income Cap, which works on thresholds – so the more you earn, the higher that cap. It varies between 4.5 to 5.5 times your income, whether that’s your salary and dividends or net profit if you’re a sole trader. It could also be retained profit in the company plus salary.
Just because those caps exist, you’re not necessarily going to reach the top level. The next thing the mortgage lender is going to build into their affordability model are your financial commitments. That could be something on your credit report like car finance, or whether you’re paying child maintenance or nursery fees. All these things will come into it to pump out a figure at the end.
Can I remortgage with one year’s accounts?
Yes, it’s largely the same thing whether you’re remortgaging or buying. We’d end up with the same limited set of lenders that consider one year’s accounts. They will almost certainly want to look at the latest performance.
Let’s imagine a limited company director. They have nine months after the year end date to submit those accounts so we’re potentially looking at income earned a long time ago. Naturally any lender is going to want to look at more recent bank statements to check that there’s evidence of the same level of income stated in the accounts. It’s all about building up the narrative and evidence for the mortgage provider to lend you that money.
What if I have bad credit? Can I still get a mortgage with one year’s accounts?
In the current economic climate even people with good income are getting themselves into bad credit from circumstances beyond their control. I’m seeing more and more of this now.
A mortgage is a bit like those Venn diagrams that we did at school, with the interlinking circles. We start off with roughly a hundred mortgage lenders out there, but each element of criteria puts them in a different circle within the diagram. Having one year’s accounts means the available lenders are already quite limited. Then we have to find lenders that overlap with the bad credit circle, which will narrow down the lenders more.
The short answer is yes, we can, but It does get more tricky and will depend on your specific situation.
Are there many lenders that accept one year’s accounts?
I’m not going to name the specific lenders as these do change, but I could probably count them on one hand.
How do I apply for a mortgage with one year’s accounts?
You essentially have two choices. You could try to do it yourself if you’re feeling confident to do a little research on the internet. You may be successful, I don’t know. But finding the right lender with one year’s accounts is about as tricky as it comes – and if you’re trying to link in with adverse credit, the lenders you need may only distribute their products through Mortgage Brokers.
Even if you have all the confidence in the world you may not actually be able to access a lot of these lenders without a broker. With us, you stand a much higher chance of getting your mortgage successfully approved, because we’re experienced in doing this day in, day out.
Your home may be repossessed if you do not keep up with your mortgage repayments.
CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 05/02/2024.
Speak To An Expert
Self-Employed One Years Accounts (Part 2)
David Sharpstone joins us to answer more questions to help self-employed individuals who are looking to apply for a mortgage with one year’s accounts.
Podcast approved by The Openwork Partnership on 6/6/2024
How long does the mortgage application process usually take for self-employed individuals with one year’s accounts?
Generally speaking a self-employed mortgage application is going to take a little longer than for somebody who’s employed, because there’s always more underwriting. There’s more paperwork to check.
With just one year’s accounts we’re often approaching a specialist mortgage lender, not one of the high street brands. It’s going to be a lender you’ve never heard of – and there’s nothing wrong with that.
That lender is taking a little bit more of a risk due to the lack of track record when you only have a year’s accounts, so they’re likely to want more detail and do more analysis.
You can expect that lender to spend more time looking at your business bank statements and the performance of the business so far. They might also ask your accountant for a projection about the year ahead – all these things take additional time.
Are self certification mortgages still available for self-employed individuals with only one year’s accounts?
No, they don’t exist any more. They are long gone – they went with the dinosaurs.
What interest rates can I expect as a self-employed mortgage applicant with one year of accounts?
As we speak in May 2024, depending on the level of deposit you have and your credit history, interest rates vary from 4.5% up to about 7% or even 8% if you’ve really got a bad credit report.
I appreciate that’s a really wide range – it’s not really going to help or give you any indication of what the payments are going to be, so talk to a broker for a more specific answer.
Can I apply for a joint mortgage with a partner who has a regular income, even if I’m self-employed with a year’s accounts?
I’m assuming by ‘regular income’ we mean employed. So let’s assume they are employed and want to get a mortgage with someone who has one year’s accounts. There can be difficulties here: having an employed income is not the problem, but a year’s accounts is certainly a hurdle to overcome.
The likelihood is we will be looking at specialist mortgage lenders. There are one or two high street lenders that will be happy if a substantial deposit is going down – often around 25% of the purchase price.
But certainly you would need to be prepared with a very well-qualified accountant who can provide a projection of the next year and back that up with some commentary.
Are there any specific challenges or risks that self-employed individuals face when applying for a mortgage with one year’s accounts?
The challenge with a year’s accounts is convincing the underwriter that you will have continued business sustainability. The difficult bit is trying to get an accountant to provide everything in a timely manner, as they need to provide evidence of the ongoing turnover to support the level of income used on the mortgage application.
If you don’t have an accountant that’s a member of one of the main accounting professional bodies, now is the time to make that change. Almost certainly, if you’ve only got one year of accounts, you will find it more difficult – but not impossible – to get a mortgage.
If you’re a company director as opposed to just being a sole trader, having an accountant with the correct professional qualifications to satisfy a lender is paramount.
What happens if my year’s worth of accounts show low or fluctuating income? Can I still qualify for a mortgage?
A mortgage lender knows that if you’re self-employed, you’re not going to be on a fixed income coming every month. Fluctuation is not an issue.
But if it’s fluctuated to nothing and you haven’t had an income for the last three months prior to applying for a mortgage, that’s a different situation. You will need to show your business bank statements over the last six or more likely 12 months to evidence that there is money still coming into your business.
In terms of getting a mortgage with a low income, it depends how much you want to borrow. If someone earning £25,000 wants to achieve a £500,000 mortgage, forget about it. Even a £100,000 mortgage can still be challenging.
On the surface of it, you might think that’s only four times income and lenders will usually lend 4.5 times income. But there’s a bit of a myth there. Mortgage lenders will look at your income as a self-employed person and allow for a certain amount of tax to pay on that.
You’re not going to have £25,000 coming into your pocket. So the lender would factor in a certain amount for tax, utility bills, plus costs for food, travel and essential living expenses.
If you’ve got a very low income and you’re only just covering those average expenses, there may not be any surplus income available to support a mortgage payment. So don’t just assume you can borrow four times your income – it doesn’t quite work like that. You’ve got to have enough to cover the bills first.
Are there any government schemes or support available to assist self-employed individuals with a year’s worth of accounts?
There are no government schemes specifically for self-employed people. The only widespread government scheme right now is the shared ownership affordable housing scheme. It’s a part-buy, part-rent scheme – and that’s open to all to employed and self-employed people.
So as long as there is a mortgage lender that can do shared ownership with one year’s accounts, you can take part in the scheme.
Can I use additional sources of income, such as rental income from properties or dividends, when applying for a self-employed mortgage with one year of accounts?
If you’ve got a taxable income, usually yes. It might be from a separate weekend job that you’ve been doing for at least six months, or ideally longer. Or maybe you’ve got rental properties or investments. These are all taxable incomes that can support a mortgage application.
If you just have one year of accounts, each lender has different rules. But generally speaking, additional incomes can be considered.
Is it possible to make overpayments or pay off a mortgage earlier as a self-employed individual with a year’s worth of accounts?
It’s a really good idea to try and pay your mortgage earlier if you have surplus income, because most mortgage lenders allow you to make overpayments without penalties.
Being self-employed makes no difference. You’re still entitled with most mortgage lenders to chip away at that mortgage and pay it off a little bit quicker. You’re generally allowed to overpay by about 10% of the outstanding balance per year.
I would encourage anybody that does have surplus income to make that overpayment and clear your mortgage quicker.
Can I get a Buy to Let mortgage with a year’s accounts?
Buy to Let mortgage lenders are more flexible when it comes to personal income. Some want to see a minimum of £25,000 – which could be earned from self-employment with one year’s accounts. It’s different from lender to lender.
There are plenty of mortgage lenders who will accept one year of accounts, no problem. The reason is that on a Buy to Let mortgage, lenders are more concerned about the potential rent the property can achieve than income.
They do want to understand if you are a higher rate or basic rate taxpayer, especially whether you earn £45,000 or £60,000 – putting you either side of the brackets. That’s going to have the most impact on the amount you can borrow.
What steps can I take as a self-employed individual to increase my chances of securing a mortgage with one year’s worth of accounts?
The number one tip is to get a mortgage broker to look over your income documents, your tax returns, your company returns and give you a rough idea on your borrowing potential before you start.
Before clicking through Rightmove or Zoopla, you want to really know that it is achievable. Otherwise you’re going to be wasting your time and potentially a lot of heartache.
Secondly, if your most recent set of documents are close to or more than 18 months old, consider getting more up-to-date documents from your accountant, from inland revenue or Companies House. You might need to do a more up to date submission if you are at that stage in your accounting year.
From a tax perspective, having older documents is fine and doesn’t break any rules. But sometimes mortgage lenders don’t like documents that are over 18 months old. They can be rejected, and the lender then asks for fresh documentation.
Third, check the qualifications of your accountant. If they are not part of a common professional accounting body like ACA, ACCA, CIMA and CIPFA, a lender may not accept their reporting.
Ask your accountant who they subscribe to as their professional body and give that information to your broker. You will be relying on the information that your accountant provides, and we need it to be accepted by the mortgage lender.
Next, check your recent bank statements and make sure they show a level of income consistent with your turnover. If your accounts show that you turned over £500,000 last year with £100,000 profit, but your last three months’ statements only show £5,000 a month coming in, it will be difficult to convince a mortgage lender. Your bank statements need to show a level of income that’s consistent with that sort of turnover.
Aside from those self-employed specific points, there are the standard recommendations about getting mortgage ready. Those include checking your credit report or asking your broker to look at it. Generally, a broker is there to give their opinion on your likely success rate.
Is it beneficial to work with a mortgage adviser or broker if you’re self-employed with one year of accounts?
Massively. I would say it’s essential. If you go and see a mortgage broker, there’s no harm in asking what their experience is like and how long they’ve been a mortgage broker for.
The reason I say that is that it’s quite easy to become a mortgage broker. There are academies out there you can pay to push you through your exams in just six weeks. So a broker with very little experience and who has only been doing the job for a few months may not have the level of knowledge to be able to advise you correctly.
They will be eager to learn from you – but people also learn from their mistakes. You don’t really want to be a guinea pig.
And if you are self-employed – let alone self-employed with one year’s accounts – and you’re thinking of doing it yourself, I wish you all the luck in the world. It’s a minefield out there.
YOUR pROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
CIS Mortgage Advice is a trading style of Just Mortgages Direct Limited which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 6/6/2024.
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