Being self-employed doesn’t mean you have to settle for higher mortgage rates. In fact, many self-employed individuals are able to secure competitive deals. In this guide, we’ll explain how mortgage lenders assess self-employed applicants, the key factors that affect your interest rate, and the steps you can take to improve your chances of securing the best possible deal.

How mortgage lenders assess self-employed applicants

When applying for a mortgage, lenders need to make sure you can afford the repayments. For self-employed applicants they usually look at a few key factors to assess your financial stability:

  • How long you’ve been self-employed – Lenders like to see that you’ve been running your business for a while. The longer you’ve been self-employed, the more likely they’ll see you as a reliable borrower.
  • Income consistency – Lenders want to know that your income is steady. If your earnings are unpredictable or fluctuate greatly, it could be harder to get approved. Consistent income from your business gives lenders confidence that you can afford the monthly payments.
  • Business health – Your business needs to be stable. If your business is doing well, lenders will feel more confident about your ability to make your mortgage payments. This could mean looking at your profits, expenses, and overall business growth.
  • Credit score – Lenders will also check your credit score to see how well you manage debt. A good credit score suggests that you pay your bills on time and can be trusted with a mortgage loan.

If you’ve been self-employed for a number of years and your income is steady, it can help you get a better mortgage rate. Lenders prefer applicants with a solid financial history and stable income.

What factors influence your mortgage interest rate?

Several factors affect the mortgage rate that lenders will offer you. Here are the main things they consider:

  • Credit score – Your credit score plays a big role. The higher your score, the better the rate you’re likely to get. A good credit score shows lenders that you can manage debt well. To get the best mortgage rate, it’s important to have your credit in good shape before you apply.
  • Deposit size – The size of your deposit is also important. A larger deposit reduces your loan-to-value (LTV) ratio. A lower LTV means you are borrowing less in comparison to the value of the property, which makes you a less risky borrower. As a result, lenders will offer you a better rate.
  • Income and debt – Lenders will look at both how much you earn and how much you owe. If you have a high income but also a lot of debt, your mortgage rate may be higher. They want to make sure you can afford the monthly repayments based on your overall financial situation.
  • The type of mortgage – The type of mortgage you choose will also affect your rate. For example, a fixed-rate mortgage has the same interest rate for the initial fixed term, while a variable-rate mortgage can change over time. The type of mortgage you pick can influence how much you’ll pay over the life of the loan.

How to prove your income as a self-employed applicant

One of the biggest challenges when applying for a self-employed mortgage is proving your income. Lenders need to see that you have a stable income and can afford the monthly repayments. Here’s what you might need to provide:

  • Tax returns – Lenders usually ask for the last two years of your tax returns. This is one of the main documents used to verify your income and show that it’s consistent.
  • Bank statements – Bank statements can give lenders a clear picture of your earnings and spending habits. They can also show whether you have a regular income stream.
  • Business accounts – If you’re self-employed, lenders will want to see your business accounts. These documents prove how much your business is earning and how much profit it’s making. It’s important to keep your business accounts up to date to ensure you’re ready for your mortgage application.

By having these documents prepared, you can speed up the process and increase your chances of getting approved for a mortgage.

Can specialist lenders offer better deals for self-employed borrowers?

Some lenders specialise in helping self-employed borrowers. These lenders understand the unique financial situations that self-employed people often face, and they may offer more flexible options. Specialist lenders can:

  • Offer more tailored mortgage options – They may have products specifically designed for self-employed people, which could be more suitable for your needs.
  • Consider your business income more closely – Instead of just looking at regular pay slips, they take a closer look at your business’s earnings and profits to get a better understanding of your financial situation.
  • Provide more flexible terms for self-employed people – Specialist lenders are often more flexible with the terms of the loan, which can make it easier for you to get a mortgage.

Should you use a mortgage broker if you’re self-employed?

Using a mortgage broker can be especially helpful if you’re self-employed. Here’s why:

  • They know the market – Brokers have access to many different lenders, including specialist ones, and can find the best deals for self-employed applicants.
  • They save time – Brokers handle the paperwork, liaise with lenders, and help you find the right mortgage faster.
  • They offer expert advice – A broker can explain your options and help you understand your mortgage better.

A broker can simplify the process and make sure you get the best deal.

Other factors that influence mortgage interest rates

Apart from being self-employed, other factors that can affect your mortgage rate include:

  • Type of property – If you’re buying a non-standard property (e.g., a flat), the interest rate may be higher.
  • Economic conditions – Interest rates can vary based on the economy. Rates may be higher if the Bank of England increases the base rate.
  • LTV ratio – A higher deposit can lead to a lower LTV, which can help reduce your mortgage rate.

Secure the best mortgage deal

Being self-employed shouldn’t stop you from obtaining a great mortgage deal. By understanding how lenders assess your application, what factors influence your interest rate, and how to prove your income, you can increase your chances of securing a competitive deal. And don’t forget – specialist lenders and brokers can offer great advantages, tailoring deals to your unique situation.

Ready to find the right mortgage deal for your self-employed status? Find a mortgage broker today!