Mortgage broker Jamie Elvin has clarified the 'three-year rule' for self-employed borrowers, stating that it is a myth that they need three full years of accounts to get a mortgage. The clarification comes as more people become self-employed due to a challenging jobs market.
Rise in self-employed mortgage enquiries
Since higher National Insurance contributions for employers were introduced in April last year, many companies have paused hiring. This has led to a growing number of people setting up their own businesses out of necessity. Consequently, Jamie Elvin, director of UK-wide broker Strive Mortgages, has seen an increase in newly self-employed individuals asking if they can get a mortgage, often expecting to be refused because they lack three years of accounts.
Elvin said: “One of the biggest mortgage myths among people who have recently set up a business is that they will have no chance of getting a mortgage until they have been running for three years with three full sets of accounts. However, this simply isn’t true and I’ve lost count of the number of times I’ve had to say it to self-employed clients looking for a mortgage.”
Lenders are adapting
Many specialist lenders and selected high street lenders now accept just one full year of accounts, and almost all high street lenders accept two years, according to Elvin. He noted that banks have become more agile and comfortable with self-employed applicants because the number of self-employed people and those with multiple income streams is growing.
Elvin said: “Banks are now much more agile and comfortable when it comes to self-employed applicants. In part, this is because the number of self-employed and people with multiple income streams is growing all the time so they have had to adapt.”
How lenders assess income varies
Different lenders look at accounts in different ways, which can significantly affect borrowing amounts. Elvin gave an example: a company running for two years with two full sets of accounts, earning £100,000 in the latest year and averaging £75,000 over two years. Some lenders lend based on the latest set of accounts, allowing a loan of £500,000 at a 5x multiple, while others average income over two years, capping the loan at £375,000.
Income multiples for self-employed are similar to employed applicants, around 4.5-5x income, but some lenders stretch to 5.5x or even 6.5x. Elvin stressed the importance of knowing which lenders are more flexible, as criteria vary significantly.
Salary and dividends considerations
Another key factor is whether lenders only consider salary and dividends or also include the company's net profit. Elvin illustrated: a director taking £10,000 salary and £40,000 in dividends totals £50,000, resulting in a £250,000 mortgage at 5x. However, if the company's net profit is £100,000, some lenders will consider that on top of the salary, enabling borrowing of £550,000 at five times income.
Elvin said: “Same director but totally different borrowing power. Knowing how different lenders are prepared to look at your company’s finances is absolutely key when you’re self-employed and applying for a mortgage.”
