One of the most common concerns self-employed borrowers have when applying for a mortgage is how lenders treat fluctuating income. This worry often increases during tax season, especially if the most recent year looks different from the one before.
While many lenders use an average of previous years’ income, this isn’t a fixed rule. In some situations, lenders will rely on the latest year alone, and in others, they may still consider applications from borrowers with only one year of trading.
Understanding when lenders average income, and when they don’t, can help avoid unnecessary concern and ensure applications are assessed on the most appropriate basis.
Why Lenders Average Self-Employed Income
For many self-employed mortgage applications, lenders aim to assess income sustainability rather than focusing on a single snapshot in time.
To do this, they often:
- Average income over the last two years, or
- Use the lower of the two years if income has decreased
This approach is most commonly applied to:
- Sole traders
- Partnerships
- Limited company directors with variable drawings
Averaging helps lenders manage risk where income fluctuates, which is common for self-employed borrowers.
What Happens If the Latest Year Is Lower?
If income has decreased in the most recent tax year, many lenders will:
- Use the lower figure, or
- Base affordability solely on the most recent year
This can feel concerning during tax season, particularly if the drop was temporary or linked to one-off factors. However, different lenders apply this rule differently, and outcomes can vary depending on the wider income trend.
This is why lender choice remains critical when income has dipped.
When Lenders May Use Only the Latest Year
In some circumstances, lenders are willing to assess affordability using just the most recent year’s income, particularly where figures are increasing.
This may apply when:
- Income shows a clear upward trend
- The business is well established
- Supporting documentation aligns with the income pattern
Some specialist lenders are more comfortable with this approach, and in certain cases, it can result in higher borrowing capacity compared to an averaged figure.
Can You Get a Mortgage With Only One Year of Accounts?
Yes, it is possible.
While many lenders prefer at least two years of trading history, there are high street lenders who can consider one year of tax calculations for self-employed applicants who:
- Have recently become self-employed
- Previously worked in a related employed role
- Can demonstrate consistency within their profession
This is often relevant for professionals who have moved from employment into self-employment and are concerned that their trading history is too short.
How This Fits With Income Timing and Tax Returns
How income is averaged also ties closely to which tax year is being used.
If income has increased:
- Submitting a more recent tax return may allow lenders to assess higher figures
If income has decreased:
- Averaging may still be applied, depending on lender rules
Income averaging rarely exists in isolation. It’s usually considered alongside how your income is structured and which tax year a lender is using.
For example, how taxable income is assessed can differ depending on whether you’re a sole trader or a limited company director, and the timing of when your tax return is submitted can influence which figures lenders rely on. When these elements are looked at together, they determine how your income is ultimately treated as part of a mortgage application.
Together, these factors determine how income is ultimately assessed.
Speak to an Adviser About Income Trends
If your income has fluctuated, increased, or you’re early into self-employment, understanding how lenders will treat your figures can remove much of the uncertainty around applying.
At Fox Davidson, income trends and lender criteria are assessed carefully for self-employed clients, particularly during tax season when decisions feel more time-sensitive.
If you’d like to discuss your circumstances, please contact the team.
FAQs
Do mortgage lenders always average self-employed income?
No. While many lenders average income over the last two years, some will use the most recent year only, particularly where income is increasing or the business is well established.
What happens if my latest year’s income is lower than the year before?
In many cases, lenders will use the lower figure or base affordability solely on the most recent year. However, this depends on lender criteria and the wider income trend for self-employed mortgage applications.
Can I get a mortgage with only one year of self-employed accounts?
Yes. Some high street lenders can consider applications based on one year of tax calculations, particularly where the applicant has recently moved from employment into self-employment in the same profession.
Will rising income increase how much I can borrow?
Potentially. If income has increased year-on-year, some lenders may use the latest year’s figures rather than averaging, which can result in higher borrowing capacity.
Is income averaging different for sole traders and limited company directors?
Yes. Sole traders are typically assessed on net profit, while limited company directors may be assessed on salary, dividends, or share of company profits. How income is averaged depends on how the income is structured and which lender is assessing it.
Should I delay my mortgage application if my income is increasing?
In some situations, waiting until more recent income can be evidenced may allow lenders to assess higher figures. Whether this is appropriate depends on timing, lender requirements, and individual circumstances.
Frequently Asked Questions
How do mortgage lenders average self-employed income?
Most lenders take the average of the last two years’ net profit (sole traders) or salary plus dividends (limited company directors). Some apply a weighted average favouring the most recent year. Specialist lenders may use the latest year alone if income has grown materially.
What if my self-employed income has dropped recently?
If the most recent year is lower than the previous year, most lenders use the lower figure rather than the average to be conservative. Specialist lenders may consider the average if the drop is explained by a one-off (Covid, parental leave, business restructure) and recent trading shows recovery.
Can lenders use my best year for affordability?
Some specialist lenders, including Kensington and The Mortgage Lender, will use the highest of the last two years where the higher year is the most recent. Lenders rarely use a higher year that was not the most recent unless it was the prior year and recent income shows continuation.
Do lenders use net profit or turnover for self-employed mortgages?
Lenders use net profit, not turnover. Net profit is gross income minus allowable business expenses, capital allowances, and other reliefs. Turnover is gross income before expenses, which is usually significantly higher than the figure lenders use for affordability.
How is partnership income averaged for a mortgage?
Partnership income is assessed on the partner’s share of net partnership profit, evidenced by partnership accounts and the partner’s tax return. Most lenders average the last two years’ profit share. Equity partners are treated as self-employed; salaried partners on a fixed drawing are treated as employed.
Will a single bad year ruin my mortgage application?
Not necessarily. A single weak year is placeable with specialist lenders if the most recent year shows recovery and the cause is documented. The Mortgage Works, Aldermore, and Kensington routinely consider these cases. High street lenders are generally less flexible.
How long does the underwriting take for averaged self-employed income?
Self-employed underwriting typically takes one to two weeks longer than employed income cases. The accountant verification, business bank statement review, and SA302 cross-check add to the timeline. Total application-to-completion is typically four to seven weeks.
Can a recent surge in self-employed income be used for a higher mortgage?
Specialist lenders will consider the latest year’s higher income with a brief letter from the accountant explaining the increase (new contract, business expansion, investment payoff). Halifax, Kensington, and Aldermore have explicit criteria allowing this. Most high street lenders will revert to averaging.