Getting a mortgage as a new business owner

If you have a great new business idea, you're probably raring to get started with turning it into a profitable venture. But will this mean you can't get on the property ladder? Not necessarily.

Lenders have relaxed their rules in recent years to help entrepreneurs pursue their new businesses and buy their own homes. If you already have a mortgage, you may be able to remortgage in a way that makes managing your monthly bills easier while you juggle your business's cash flow.

This blog takes you through the key considerations you need to make before starting your business or applying for a mortgage as a newly self-employed person.

Can I get a mortgage if I've just started my own business?

As a new business owner, you might be wondering if you're eligible for a mortgage. Getting a mortgage is one of the major steps to take when climbing the property ladder.

In the UK, most lenders require borrowers to have a stable income, good credit history and meet their lending criteria. However, as a new business owner, your situation may be different.

Is it harder to get a mortgage as a business owner?

Yes, it can be more challenging, as the lender has to assess your financial situation and income in a slightly different way. One of the main reasons is that business owners may take their remuneration in ways that aren't as straightforward as receiving a fixed salary.

As a business owner, you may receive income in the form of dividends, which can make it harder for a lender to validate your income based on your tax returns and financial records. Moreover, if you've set up your business as a limited company, lenders may apply more stringent requirements and lending criteria.

It's also true that most lenders ask for proof of income and accounts for the last few years to make sure you're able to pay off the mortgage. You must provide detailed accounts and statements to prove that you have consistent, regular income streams that will allow you to make mortgage repayments.

However, working with a specialist mortgage adviser or broker who has experience in dealing with self-employed borrowers can go a long way in helping you secure a mortgage. They can offer expert advice on how to present your accounts and show your income streams to meet the lender's requirements accurately.

Different types of mortgages are available for new business owners, such as self-employed mortgages, which are designed for those who don't have the benefit of a regular salary. However, these mortgages may have stricter requirements when it comes to providing evidence of income and accompanying accounts.

Does starting a business affect your mortgage?

It can affect your ability to get a mortgage. This is because lenders generally view a new business as risky and need to make further checks to ensure the business will stay profitable in the future.

It's important to understand that a lender bases its decision to grant a mortgage application on its assessment of both your ability to repay the loan and the security of the property you're buying.

If you're starting a business and applying for a mortgage, lenders are likely to scrutinise your personal financial situation. This includes:

• checking your credit score

• looking through your accounts

• reviewing your bank statements

A low credit score or an irregular income stream can lead to a higher level of scrutiny, making it harder for you to secure a mortgage.

Ways to improve your chances of getting a mortgage

However, getting a mortgage as a new business owner isn't impossible. There are ways to increase the probability of being granted one.

• Pay the lender a larger deposit. This gives the lender a higher level of security since it's providing a smaller percentage of the property's value as a loan and so is less likely to suffer significant losses.

• Have a good track record of experience in your industry. A history of consistent income and stable employment can assure the lender that you're likely to remain profitable as a business owner going forward.

• Look for specialist lenders or mortgage brokers who understand the challenges you face. They may have access to a wider range of mortgage products designed specifically for new business owners or people in your position.

Preparing to get a mortgage as a new business owner

When you're self-employed and seeking a mortgage, you typically need to show a lender the following three items:

• SA302 (self-assessment tax return)

• Bank statements (from up to three months)

• 12 months of trading accounts

Think about taking a salary from your business so that you can prove a steady income. If you take most of your income as dividends, it might make sense to have a higher proportion as salary for your mortgage application.

It's important that your business's accounts look healthy. Make sure you're paying bills and taxes on time and have answers for any drops in profit – lenders may not see them as an issue if you provide a good reason.

If possible, try to hold off on any large purchases until your mortgage has gone through and you have a strong enough cash flow to make those buys.

While lenders may not ask to see contracts of future work you have in the pipeline, gathering these details can be helpful as a way to prove your income. So, if you're having conversations with clients, try to firm these up into contracts.

VIDEO: Secure the best deal on your next mortgage as a freelancer

Watch this webinar and learn how to start your mortgage application and how to get the best rate as a self-employed professional:

How to get a mortgage as a new business owner

Start by knowing what the lender needs

When applying for a mortgage, you must be ready to provide more paperwork compared to a traditional employee. Mortgage lenders are particularly interested in your business's financial situation and your personal income.

You'll need to provide evidence of income such as tax returns and business bank statements. The documentation required depends on the lender and the type of mortgage.

Know what types of mortgages are available

Mortgages for business owners typically fall into two categories:

• Fixed-rate mortgages: Guarantee a fixed interest rate for a specific period, which helps you plan and manage your repayments.

• Variable-rate mortgages: Rates may fluctuate, which means your mortgage repayments may go up.

Look for specialist lenders

Specialist lenders can provide a full range of lending products, including flexible loans to cater for different needs, including self-employed borrowers.

These lenders will accept a range of business structures, including limited companies and sole traders, and they will typically consider retained profits rather than taxable income.

In contrast to traditional lenders who could ask for several years of trading history to consider a mortgage application, specialist lenders can use the latest one or two years of business accounts to assess your eligibility.

Get your business accounts and finances in order

When you're self-employed and seeking a mortgage, you typically need to show a lender the following three items:

• SA302 (self-assessment tax return)

• Bank statements (from up to three months)

• 12 months of trading accounts

Think about taking a salary from your business so that you can prove a steady income. If you take most of your income as dividends, it might make sense to have a higher proportion as salary for your mortgage application.

It's important that your business's accounts look healthy. Make sure you're paying bills and taxes on time and have answers for any drops in profit – lenders may not see them as an issue if you provide a good reason.

If possible, try to hold off on any large purchases until your mortgage has gone through and you have a strong enough cash flow to make those buys.

Make a plan for reducing outstanding debts or payments which could negatively affect your credit score. Regarding credit scores, make sure you check yours and, if necessary, take steps to improve it.

While lenders may not ask to see contracts of future work you have in the pipeline, gathering these details can be helpful as a way to prove your income. So, if you're having conversations with clients, try to firm these up into contracts.

Work with specialist mortgage advisers

Specialist mortgage advisers have access to a wide range of mortgage products for business owners. They can give you support and guidance to help you present your case to the mortgage lenders you've chosen.

Mortgages for self-employed people

If you're self-employed, getting a mortgage can be more complicated than it is for traditional employees. Mortgage lenders have specific requirements that you must meet before they can approve your application. But with the right guidance and information, you can easily navigate the process and secure a mortgage.

Can I get a mortgage if I'm newly self-employed?

Yes – it's just there are some extra steps and requirements to consider compared to someone who works for an employer. Since you're self-employed and don't have a limited company, mortgage lenders will take your personal finances, including your business income, into account.

Read more:

• How to get a mortgage if you're self-employed

Mortgages for company directors

Can I get a mortgage if I'm a newly appointed director?

If you're a newly appointed director and looking to get a mortgage, there are some requirements that you'll need to satisfy before you can borrow from a lender.

• Proof of income and financial status. You'll need to demonstrate to your lender that you can manage your finances effectively and have a stable source of income to pay off your mortgage. This proof may include your company accounts, bank statements and tax returns.

  Your income will typically include the salary and dividends that you earn from the business. However, it's important to note that some lenders may not consider retained profits when assessing your earnings, which could affect the amount you can borrow.

• Personal guarantee. The lender asks for this security, which shows that you're personally liable for the loan. This means that if your business is unable to keep up with mortgage repayments, you'll be personally responsible for covering any shortfall.

• Credit score. A lender will take this into account when assessing your mortgage application. Having a good credit score will improve your chances of being approved.

• Track record. The lender will assess your ability to run a business successfully. If you have a good track record, it will make it easier for you to get approved for a mortgage.

• Deposit. The size of your deposit will also affect your ability to get a mortgage. Having a larger deposit will make you less of a risk to the lender, and they may offer you more competitive mortgage rates.

Can I use my business to get a mortgage?

Yes, but it depends on several factors, such as your business's financial standing, income and profitability.

When applying for a mortgage, lenders will assess your credit rating, financial situation and overall ability to repay the loan. This means that as a business owner, you need to make sure your business is financially healthy and has a solid track record of income and operating at a profit.

To use your business to get a mortgage, you'll likely need to give the lender some documentation. This may include tax returns, business bank statements and proof of income. Providing this information shows the lender that your business is financially stable and can reliably generate income to repay the mortgage.

A lender may require a larger deposit or a higher level of income to offset any perceived risk of lending to you. This is because your business's income and profitability may fluctuate, which could affect your ability to make your mortgage repayments. This is why having a consistent track record of income and profitability can increase your chances of being approved.

Different mortgages available to new business owners

As a new business owner, it's crucial to understand the different types of mortgages available to you.

Commercial mortgages

Ideal if you're looking to use a property solely for business activities – for example, an office space, a warehouse or a retail unit.

Commercial mortgages are typically available for up to 25 years and require a larger deposit than residential mortgages. Lenders may also ask for extra documentation, such as business accounts, to evaluate your eligibility.

Buy-to-let mortgages

An attractive option for business owners looking to invest in a property and rent it out. This could provide an additional source of income and even help you pay off the mortgage. However, lenders may require a larger deposit and determine your eligibility by assessing the rental income you expect to make.

Interest-only mortgages

As the owner of a new business, one of the most important aspects of managing your finances will be flexibility, to stay on top of your cash flow. The right mortgage can give you exactly that.

Interest-only mortgages offer this kind of flexibility. You'll only have to pay the interest each month, meaning your payments will be lower.

Although interest-only mortgages are generally more expensive in the long term, they can be helpful, at least for a short time, while you get your business off the ground.

Joint borrower sole proprietor (JBSP) arrangement

Another solution may be to get a joint borrower sole proprietor (JBSP) arrangement in place.

With this mortgage, you would be the only person named as the owner of your property, but other people would be able to cover your mortgage payments. This arrangement can work well if family members (for example) have said they would like to support you as you start a business.

Refinancing

A useful tool for unlocking the capital represented by a property you already own. Refinancing allows you to take out equity from the property and use it for other purposes, such as funding your business. The interest rates on refinancing can sometimes be lower than those of other loans, making it an affordable way to access capital.

Remortgaging as a new business owner

Ideally, you should aim to remortgage before you start your venture. By doing so, you could lock in a five-year deal, which will mean your monthly repayments stay the same while you get your business up and running.

If possible, you may want to look at extending the term of your mortgage to reduce your monthly payments. Although a longer-term loan will see you paying more interest over time, having this flexibility in your monthly budget can really help you stay on top of your incomings and outgoings while your income is unpredictable.

Using equity release to start a business

If you're thinking of using equity built up in your home as cash for your business, you need to tread carefully. It is possible to remortgage and release equity for business purposes, but the lender will secure the higher mortgage amount against your home.

If you can't keep up with repayments, you would be putting your home at risk of getting repossessed. So, make sure you seek advice before releasing equity.

Relevant resources

• Lunch and Learn: Secure the best deal on your next mortgage as a freelancer

• How small business owners and the self-employed can deal with the high cost of mortgages

• How to get a mortgage if you're self-employed