How much deposit do I need for a self-employed mortgage?

If you’re self-employed and looking to secure a mortgage in the UK, one of the most crucial factors to consider is the size of your deposit. The amount you’ll need can vary depending on several factors, but having a clear understanding of deposit requirements can significantly improve your chances of mortgage approval. In this comprehensive guide, we’ll explore how much deposit you typically need for a self-employed mortgage and what factors might influence this amount.

The Short Answer: Typical Deposit Requirements

For most self-employed individuals seeking a mortgage in the UK, lenders typically require a minimum deposit of 10-15% of the property’s value. However, the exact amount can vary based on your specific circumstances, with some situations requiring as little as 5% or as much as 40% or more.

Factors Influencing Deposit Requirements for Self-Employed Mortgages

Several factors can affect how much deposit you’ll need as a self-employed mortgage applicant:

1. Length of Self-Employment

Generally, the longer you’ve been self-employed, the lower your deposit requirement might be. This is because:

• Lenders typically want to see at least two years of accounts
• A longer track record can demonstrate stability and reliability of income

If you’ve been self-employed for less than two years, you might need a larger deposit to offset the perceived risk.

2. Nature of Your Business

The type of self-employment or business you’re in can influence deposit requirements:

• Stable, established industries might require lower deposits
• Newer or more volatile sectors could necessitate higher deposits

3. Income Stability and Growth

Lenders will closely examine your income:

• Consistent or growing income may lead to lower deposit requirements
• Fluctuating or declining income might necessitate a larger deposit

4. Credit Score

Your credit history plays a crucial role:

• Excellent credit score could result in lower deposit requirements
• Poor credit history might mean you need a substantially larger deposit

5. Loan-to-Value (LTV) Ratio

The LTV ratio is a key factor:

• Lower LTV ratios (larger deposits) are generally more favourable to lenders
• Higher LTV ratios (smaller deposits) may be available but often come with higher interest rates

6. Property Type and Value

The property you’re looking to purchase can affect deposit requirements:

• Standard residential properties might require lower deposits
• Unusual or high-value properties could necessitate larger deposits

Typical Deposit Scenarios for Self-Employed Mortgages

Let’s explore some common scenarios to give you a clearer picture of potential deposit requirements:

1. Minimum Deposit (5-10%)

You might be able to secure a mortgage with a 5-10% deposit if:

• You’ve been self-employed for 3+ years with stable or increasing income
• You have an excellent credit score
• Your business is in a stable industry
• You’re applying for a standard residential property

2. Standard Deposit (15-20%)

A 15-20% deposit is more commonly required and might apply if:

• You’ve been self-employed for 2-3 years
• You have a good credit score
• Your income is relatively stable
• You’re applying for a typical residential property

3. Larger Deposit (25-40%)

You might need a deposit of 25% or more if:

• You’ve been self-employed for less than 2 years
• Your income is variable or has recently decreased
• You have a lower credit score
• You’re applying for a high-value or unusual property
• Your business is in a more volatile industry

4. Substantial Deposit (40%+)

In some cases, you might need a deposit of 40% or more, particularly if:

• You’ve only recently become self-employed
• You have a poor credit history
• Your income is highly variable or difficult to prove
• You’re applying for a very high-value property or one with unique characteristics

Strategies to Reduce Deposit Requirements

If you’re finding it challenging to meet deposit requirements, consider these strategies:

1. Improve Your Credit Score: Pay bills on time, reduce existing debts, and correct any errors on your credit report.
2. Stabilise Your Income: Try to demonstrate consistent or increasing income over time.
3. Save for Longer: If possible, delay your mortgage application to save a larger deposit.
4. Use a Specialist Mortgage Broker: They can help you find lenders who are more flexible with self-employed applicants.
5. Consider Joint Ownership: If applicable, applying with a partner or family member might reduce deposit requirements.
6. Explore Government Schemes: Look into initiatives like Shared Ownership, which can reduce deposit needs.
7. Demonstrate Business Growth: Show lenders that your business is expanding and becoming more stable over time.
8. Provide Additional Security: If you have other assets, you might be able to use these as additional security.

The Impact of Deposit Size on Mortgage Terms

It’s important to understand that the size of your deposit doesn’t just affect your ability to secure a mortgage; it can also significantly impact the terms of your mortgage:

1. Interest Rates: Generally, larger deposits lead to lower interest rates. This is because you’re seen as a lower risk to the lender.
2. Loan Amount: A larger deposit means you’ll need to borrow less, potentially making monthly repayments more manageable.
3. Mortgage Products: Some mortgage products with more favourable terms may only be available to those with larger deposits.
4. Loan-to-Value (LTV) Ratio: A lower LTV ratio (bigger deposit) often means more competitive mortgage deals.
5. Mortgage Term: With a larger deposit, you might have more flexibility in choosing the length of your mortgage term.

Special Considerations for Self-Employed Mortgage Applicants

As a self-employed individual, there are some additional factors to consider when planning your mortgage deposit:

1. Income Fluctuations: If your income varies significantly from year to year, lenders might require a larger deposit to offset this perceived risk.
2. Business Structure: Whether you’re a sole trader, in a partnership, or operating as a limited company can affect how lenders view your income and, consequently, your deposit requirements.
3. Retained Profits: If you operate as a limited company, lenders will look at salary and dividends, but some may also consider retained profits in the business.
4. Industry Specific Risks: Some industries are considered higher risk by lenders, which could result in higher deposit requirements.
5. Future Income Projections: While lenders primarily focus on past income, positive projections for your business could potentially influence their decision.

The Role of Professional Advice

Given the complexities involved in self-employed mortgages, seeking professional advice is crucial. A mortgage adviser who specialises in self-employed applicants can:

1. Assess your individual circumstances and advise on realistic deposit requirements
2. Help you understand how lenders will view your income and business structure
3. Guide you on how to present your finances in the most favourable light
4. Identify lenders who are more likely to offer competitive terms to self-employed applicants
5. Assist with the entire application process, potentially improving your chances of approval

Preparing for Your Mortgage Application

To strengthen your position when applying for a self-employed mortgage, consider these steps:

1. Organise Your Finances: Keep clear, up-to-date records of your income, expenses, and tax returns.
2. Save Consistently: Demonstrate a pattern of regular savings, which can positively influence lenders.
3. Reduce Existing Debts: Lower debt levels can improve your affordability assessment.
4. Maintain a Healthy Business Cash Flow: This can provide additional reassurance to lenders.
5. Consider Your Timing: If possible, apply when your business is showing strong, stable performance.
6. Prepare a Business Plan: This can help demonstrate the future viability of your income.

Conclusion

While the general guideline for a self-employed mortgage deposit in the UK is 10-15%, the actual amount can vary widely based on individual circumstances. Factors such as length of self-employment, income stability, credit score, and the nature of your business all play crucial roles in determining the required deposit.

Remember, a larger deposit often leads to more favourable mortgage terms, including lower interest rates and a wider range of available products. However, with careful planning, professional advice, and a clear understanding of lender requirements, it’s possible to secure a mortgage with a deposit that aligns with your financial situation.

As a self-employed individual, you may face additional scrutiny from lenders, but this doesn’t mean homeownership is out of reach. By taking steps to strengthen your application, working with a specialist mortgage adviser, and being prepared to provide comprehensive documentation of your finances, you can navigate the process successfully.

Ultimately, the key to securing a self-employed mortgage with an appropriate deposit is thorough preparation and understanding of your financial position. By taking a proactive approach to your mortgage application, you can significantly improve your chances of success.

FAQs About Self-Employed Mortgage Deposits

To further address common queries, here are some frequently asked questions about deposits for self-employed mortgages:

Q1: Can I get a 95% LTV mortgage if I’m self-employed?

While it’s possible, 95% LTV mortgages (requiring only a 5% deposit) are less common for self-employed applicants. You’ll typically need a very strong application, including an excellent credit score, stable and well-documented income, and at least two years of accounts.

Q2: Do I need a larger deposit if I’ve only been self-employed for one year?

Generally, yes. Most lenders prefer to see at least two years of accounts, so if you have only one year of self-employment history, you may need a larger deposit to offset the perceived risk.

Q3: How does my business structure affect my deposit requirements?

Your business structure can influence how lenders assess your income. Limited company directors might find some lenders consider retained profits alongside salary and dividends, potentially affecting deposit requirements. Sole traders and partnerships may face stricter income assessments.

Q4: Can I use a gifted deposit for a self-employed mortgage?

Yes, many lenders accept gifted deposits, typically from close family members. However, you’ll need to provide documentation proving the source of the gift and confirming it’s not a loan.

Q5: Will having a larger deposit compensate for fluctuating income?

To some extent, yes. A larger deposit can help offset the risk associated with variable income. However, lenders will still need to be satisfied that you can afford the mortgage repayments based on your average income.

Q6: How do lenders calculate my income for affordability assessments?

This can vary between lenders, but many will take an average of your last two or three years’ income. Some may use your latest year’s figures if they’re higher. For limited company directors, lenders often consider salary and dividends, with some also factoring in retained profits.

Q7: Can I use business assets as additional security instead of a larger deposit?

Some specialist lenders might consider this, but it’s not common practice. Most high-street lenders will focus on your personal deposit and income.

Q8: How might future changes to my business affect my mortgage?

Once you have your mortgage, changes to your business shouldn’t affect it directly. However, if you’re planning significant changes, it’s worth considering how they might impact your ability to make repayments.

Final Thoughts

Securing a mortgage as a self-employed individual in the UK can seem daunting, particularly when it comes to deposit requirements. However, with the right approach and guidance, it’s entirely achievable. Remember these key points:

1. The typical deposit range of 10-15% is a guideline, not a rule set in stone.
2. Your individual circumstances, including length of self-employment, income stability, and credit score, significantly influence deposit requirements.
3. A larger deposit often leads to better mortgage terms and more options.
4. Professional advice from a specialist mortgage adviser can be invaluable in navigating the process.
5. Thorough preparation and clear documentation of your finances are crucial.

By understanding these factors and being well-prepared, you can approach your mortgage application with confidence. Whether you’re just starting to save for a deposit or you’re ready to make an application, remember that homeownership is a realistic goal for self-employed individuals. With persistence, careful financial management, and expert guidance, you can find a mortgage solution that fits your unique situation.

You can find the UK’s best mortgage advisers specialising in self-employed mortgages in our Mortgage Adviser Directory.