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How much can you borrow if you’re self-employed?

Updated: Mar 2, 2021

The short answer is: it depends. Whenever anyone applies for a mortgage, the lender carries out an “affordability assessment” to work out how much to lend you – and whether they’re willing to lend to you at all. How much you can borrow will then depend on how secure the lender feels about lending to you and what your other spending commitments are. To test your ‘mortgageability’, they’ll look at:

How much you earn on average

If you’ve been contracting or freelancing for a few years, the lender will most likely tot up your income from each year and work out your average earnings. For example, if you earned £23,000 in your first year of contracting, £28,000 in your second year and £33,000 in your third year, then your average over the three years is £28,0000. For the sake of a mortgage application this is the figure a lender will use. Or, where your earnings have been incrementally increasing, a lender may base their calculation on your most recent tax year figure.

As a rule of thumb, if you’ve got a decent deposit to put down (say 10% of the property price) and your self-employed income is consistent and well-documented, you should be able to borrow around 4.5 to 4.75 times your gross annual income (ie your salary before it’s taxed).

How much your earnings have fluctuated

Fluctuating earnings can frighten some lenders and you might end up with a lower mortgage offer than you were hoping for. If your earnings have fluctuated massively or you’ve only been working for yourself for less than a couple of years, be prepared for lenders to use your lowest earning year as your salary figure for their affordability assessment. If you can explain a dip in earnings – say you had a baby or upgraded some equipment maybe – most lenders will be satisfied that you’re still a safe bet.

What your regular outgoings are

Mortgage lenders have to be able to prove they’ve lent responsibly, so they look closely at how much people can realistically afford to pay each month. Lenders want an idea of your personal and living expenses, which is why – even though some of this information can feel a little intrusive – you should be prepared to show any or all of these payments: - Evidence of credit card repayments - Evidence of any maintenance payments - Insurance contracts (buildings, contents, life, etc) - Any other loans or credit agreements - Household bills (water, gas, electricity, phone, broadband, etc) - Estimates of general living costs (spending on clothes, groceries, childcare, going out, holidays, etc)

How secure your income is

Lenders will want to stress-test your finances to check they’re future-proof. They do this to minimise the risk of you defaulting on your mortgage payments (like when they ask you about your regular spending). The lender needs to know you’ll still be able to afford your mortgage payments if interest rates suddenly shoot up or your situation changes – like if you take time off work to have a child or you’re forced into a career break.

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