Mortgages With Decreasing Profits, Self-Employed Income Falls

What is a mortgage with decreasing profits?

A mortgage with decreasing profits is a standard mortgage application from a self-employed borrower whose most recent year of profit, profit share or company profit is lower than the year before. There is no special product; the question is how the lender assesses the income. On a home the borrower will live in, the loan is normally a regulated mortgage, meeting the legal test that at least 40% of the property is used as a dwelling (legislation.gov.uk: Regulated Activities Order, article 61). The lender must then be able to show that the mortgage is affordable under the Financial Conduct Authority's conduct rules for mortgages, MCOB. In doing so it must take into account future changes to the borrower's income that it is aware of, or should reasonably be aware of, from the application (FCA Handbook: MCOB 11.6.2R and 11.6.14R). A falling trend raises the question of whether income will fall further, and the answer depends on why profit fell and what current trading shows.

A lender that reads the latest year, or the lower of the last two years, treats a fall as the new level of income until the business shows otherwise, and a lender that averages two years may switch to the latest year when it is the lower. A fall can therefore cut borrowing sharply, although it does not rule out a mortgage. Where the cause will not recur, the accountant's letter and current-year figures can explain the fall, and some lenders will then use an average or look past the dip. Causes of that kind include a one-off investment charged in the year, a large pension contribution, a period of illness and a lost contract that has since been replaced. Where the fall is real and continuing, the options are a loan sized on the lower figure, a product transfer with the existing lender that may need no new income assessment, or waiting for the next tax return.

Which figure falls depends on how the business is set up. A sole trader is assessed on net profit from the Self Assessment return, a partner on their share of the partnership's profit, and a company director on salary and dividends or on salary plus a share of the company's profit. Our self-employed mortgages page compares the structures and the evidence each needs, and our pages on sole trader mortgages, partnership mortgages and limited company director mortgages set out each lender method in full. This page covers what changes when the latest figure is the lower one, whichever structure produced it.

Mortgage Lane arranges mortgages for sole traders, partners and company directors whose profits have fallen, including falls caused by investment, pension contributions, illness, maternity or parental leave, a lost client, a sector downturn or a change in how the business pays its owner. That covers purchases, remortgages and buy to let. Before choosing a lender we work out why the profit fell and what the current year shows, because the lender's reading of the dip sets the size of the loan.

Mortgage rates with decreasing profits

Mortgage rates with decreasing profits are generally set by each lender in the same way as for other borrowers, by product and loan to value band. At a mainstream lender a fall in profit usually changes the size of the loan it will approve, while the rate stays tied to the product. A self-employed mortgage uses the same fixed, tracker and variable rate products as a mortgage for an employee, so a borrower whose profit has fallen is usually choosing from the same range as anyone with the same deposit and credit record, provided the lender accepts the income. Where the case needs a specialist lender, for example because the fall is sharp or recent, or because a lender with more flexible income treatment is the only one that will lend enough, the product is priced for that lender's criteria and the rate may be higher. Product fees vary in the same way.

The useful comparison is the rate against the loan each lender will approve on the evidence available. A lower rate is little help from a lender that reads the lower year and supports a loan too small for the purchase. The worked example further down this page shows how far the readings can differ on the same two returns. The length of any fixed rate matters as well, because a move to a new lender when the deal ends is assessed on whichever figures are current at the time. Our fixed term mortgages page explains how fixed rates are priced.

Profits down on last year? Get in touch with both years' figures, your current-year trading and the reason for the fall. We will show what each lender approach makes of your figures before you apply, and choose the lender on how it will read the dip.

Decreasing profits mortgage criteria

Decreasing profits mortgage criteria cover the same points on every case, and each lender sets its own limits for them. The income evidence, current-year evidence, affordability and remortgage rows rest on HMRC's guidance and the FCA's rules, checked in October 2026, and the buy to let row on the standards set out in the next paragraph. The multiple and minimum income lines are Mortgage Lane's experience on the cases we arrange. The other rows describe how lenders differ, because no single rule on falling profit applies across the market, and the lender's underwriting decides each case. In our experience the standard income multiple is 5 times assessed income after credit commitments, up to 6 times for professionals and specialist products, applied to whichever figure the lender assesses. At 5 times, every £1,000 of profit a lender leaves out removes £5,000 of borrowing, which is why the lender's reading can matter as much as its rate.

A buy to let mortgage is assessed mainly on the rent. Banks and building societies test the rent against the mortgage interest at a stressed rate (an interest cover ratio) under the Prudential Regulation Authority's buy to let underwriting standards, SS13/16, which apply to buy to let lending not already regulated by the FCA (Bank of England: SS13/16). A fall in self-employed profit therefore matters less, provided the borrower meets any minimum personal income the lender sets. In our experience most lenders no longer have a £25,000 minimum. A consumer buy to let mortgage has its own regime under the Mortgage Credit Directive Order 2015 (legislation.gov.uk: Mortgage Credit Directive Order 2015). Our guide to buy to let mortgages for self-employed borrowers covers the landlord side.

Types of fall in profit, and how each is assessed

Lenders distinguish a fall with a clear, finished cause from a fall that shows the business shrinking. The first can be explained with evidence at lenders that consider it, and the second is assessed as it stands.

One-off investment or expense

A large cost charged in one year, such as new equipment, a vehicle, a refit or a legal bill, reduces that year's profit without reducing the business's earning power. How a purchase reaches the profit figure depends on how the books are kept. The cash basis is the standard way for sole traders and partnerships without corporate partners to record income and expenses, and limited companies and limited liability partnerships cannot use it (GOV.UK: who can use cash basis). On the cash basis, equipment and vans bought and kept for the business are claimed as allowable expenses, and capital allowances are claimed only on cars. Under traditional accounting, equipment and vans qualify for capital allowances instead, and the annual investment allowance can deduct up to £1 million of qualifying spending in the year (GOV.UK: capital allowances). Either way the deduction lowers that year's profit, and with it the figure a lender reads. The accountant can identify the item and show the underlying profit before it. Mortgage Lane does not give tax advice; an accountant or tax adviser can advise on how a purchase is claimed.

Get in touch with the accounts and the accountant's note on the item.

Pension contributions paid by a company

When a director's company pays a large employer pension contribution, the company's profit falls by that amount. Employer contributions are deducted as an expense in working out the company's profits, for the period in which they are paid (HMRC Pensions Tax Manual: PTM043100). On the salary plus share of net profit reading, the director's income falls with the company's profit. A lender reading the accounts sees the profit after the contribution. Whether it adds the contribution back, where the payment was clearly discretionary and one-off, depends on its own criteria. The evidence a lender would need is the scheme statement showing the payment and the accountant's letter giving the profit before it. Mortgage Lane does not give pension or tax advice, and the scheme administrator or an accountant can confirm how a contribution was treated.

Get in touch with the pension contribution evidence.

Illness, maternity or a break in trading

Time off for illness, maternity or paternity leave, or caring for someone reduces a year's profit, often for a reason that has already passed. A lender that considers an explained fall looks for evidence that trading has since returned to the earlier level. The strongest evidence is current trading back at that level, shown in management accounts or business bank statements. The core of the explanation is the dates of the break and what the business earned before and after it. Each lender decides for itself whether to look past the dip, so we gather the evidence first and choose the lender to fit it.

Get in touch with the dates and current figures.

A lost client or contract

Lenders usually read the loss of a major client as a real fall unless the client has been replaced. Evidence of new contracts, or of current income back at the previous level, helps a lender accept that the fall has ended. Where a lost client has not been replaced, the evidence points the other way, and a loan sized on the latest figure is often the sounder plan.

Get in touch with your current client list and income.

A change in how a director is paid

A director who switched from taking dividends to leaving profit in the company, or who drew smaller dividends after the April 2026 dividend tax rise, shows a fall on the salary and dividends reading. The salary plus share of net profit reading may show no fall, because it counts the director's share of the company's profit whether it was drawn or retained. From 6 April 2026 the dividend ordinary rate rose from 8.75% to 10.75% and the dividend upper rate from 33.75% to 35.75%, with the additional rate unchanged at 39.35% (GOV.UK: Income Tax rates and allowances). The rates are the same across the UK (GOV.UK: Income Tax in Scotland). With a lender that counts retained profit, the apparent decline can disappear, and our page on retained profits mortgages covers the checks such a lender makes on the cash and reserves behind it. Step 5 of the worked example on our limited company director page shows how a rising and a falling pair of years read under each method.

Get in touch with company accounts for both years.

A sustained decline

Where profit has fallen over two or three years, or the sector is contracting, lenders assess the latest figure and look harder at the trend of declining profits. Some may want a larger deposit or decline the case. The FCA's rules require a lender to allow for future changes to income it is aware of from the application (MCOB 11.6.14R), and a decline running across several returns can be read as one such change. A loan sized on the latest figure is often the right answer, and current trading that has levelled out helps show the fall has stopped.

Get in touch with three years' figures if you have them.

How lenders treat a fall in profit

How lenders treat a fall in profit depends on which figure they put into the affordability assessment. Lenders use a handful of approaches, and some apply different ones to different cases. A lender that averages two years may use the latest year instead when it is the lower, which counts a fall in full while still averaging a rise. The table sets out how each approach treats a fall, and the worked example further down shows four readings of the same figures.

Explaining a drop in profits to a mortgage lender

Lenders want a reason for the fall that they can verify, and figures showing that the cause has passed. An accountant's letter identifies the cause, whether an item of spending, a period off or a contract lost, and gives the underlying profit without it. Current-year figures, such as management accounts, Making Tax Digital quarterly updates or business bank statements, show trading back at or near the earlier level. Invoices for the investment, pension contribution statements or new contracts tie the explanation to the figures. Timing counts as well: an application made after several months of recovered trading is stronger than one made the week the return is filed.

Making Tax Digital for Income Tax has applied since 6 April 2026 to sole traders and landlords whose qualifying income, meaning turnover from self-employment and property before expenses, was over £50,000 in 2024 to 2025. The threshold falls to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028 (GOV.UK: check if you are eligible for Making Tax Digital for Income Tax). Those in the scheme, whether required to join or signed up voluntarily, send HMRC quarterly updates through compatible software. Each update is cumulative from the start of the tax year, so the update for 6 April to 5 October, due by 7 November, already holds half a year's totals (GOV.UK: send quarterly updates). Partnerships are not yet in the scheme, so a partner shows current trading through the firm's management accounts, and a company director through the company's.

Current-year figures support the case, but lenders still assess the annual tax calculation or accounts. Whether a lender gives current figures any weight, and in what form, is for the lender to decide. Sending the explanation with the application, before the underwriter asks, also avoids the delay of a query later. Our page on a mortgage declined at underwriting covers what underwriters check, and our page on a mortgage declined on affordability covers a lender that has already turned the figures down.

Remortgaging after a fall in profit

A product transfer with your existing lender does not need a new affordability assessment where you borrow no more and the terms that matter for affordability stay the same, so a fall in profit need not stop it. Under the FCA's rules, a lender does not have to reassess affordability when it replaces or varies a regulated mortgage for the same customer, provided there is no additional borrowing beyond any product or arrangement fee and no change to the terms likely to be material to affordability (FCA Handbook: MCOB 11.6.3R). The rule does not stop a lender from checking, and whether a lender looks at income or the credit file on a switch is its own policy. The trade-off against moving is that a product transfer offers only that lender's own range.

Switching to a new lender for a better rate after a drop in income is a full remortgage, assessed on the latest figures. If the balance is larger than the lower figure supports, the product transfer may be the only option until profits recover and a new return shows it. Borrowing more, whether on a remortgage or as a further advance from the existing lender, is assessed like a new loan, because extra borrowing takes the case outside that exemption. Our page on how to release equity from your home sets out the routes for raising money. A change to the term can also bring a new assessment where it is material to affordability.

The end of a fixed rate sets the timetable. A borrower whose deal ends while profit is down can take a product transfer now and look at moving once the next return is filed. Our page on one year self-employed mortgages describes the same approach for a borrower without a second year of figures.

How a mortgage with decreasing profits is arranged

1. Figures and cause review. Both years' tax calculations or accounts, current trading and the reason for the fall, with the profit worked out on each lender reading.
2. Evidence assembled. The accountant's letter, current-year figures and supporting documents, such as invoices, pension statements or new contracts.
3. Lender selection. Lenders whose treatment of a fall fits the evidence, an agreement in principle from the one chosen, and on a remortgage the product transfer compared with moving.
4. Application and underwriting. The explanation submitted with the application, so the underwriter has it before raising a query, and the lender's valuation of the property.
5. Offer and completion. The mortgage offer, then completion, with the length of any fixed rate chosen with the next set of figures in mind.

A one-off dip in profit: the arithmetic

A sole trader whose profit fell for one identifiable reason can be assessed on four different figures, depending on the evidence and the lender.

Step 1. The figures

An illustrative case, not a product or an offer: a joiner made a net profit of £60,000 in 2024 to 2025 and £45,000 in 2025 to 2026. The fall came from £15,000 spent on a new van and workshop equipment in 2025 to 2026 and deducted in full in that year, as allowable expenses on the cash basis or through the annual investment allowance under traditional accounting. Management accounts for the first six months of 2026 to 2027, 6 April to 5 October 2026, show £29,000 of profit, or £58,000 a year annualised. The joiner has no credit commitments, and the multiple is 5 times, the standard in Mortgage Lane's experience.

Step 2. Four readings of the same year

The same figures are read four ways, from the lower-year default to the most favourable reading a lender might accept. The current-trading row is evidence only, because lenders still assess the annual figures; it shows what the annualised figure would support.

On identical returns, the most favourable reading supports £75,000 more borrowing than the lower year. The fall itself is £15,000, 25% of the earlier year's profit, and at 5 times each pound of it is worth £5 of borrowing. At 6 times, the top of the range for professionals and specialist products in our experience, the lower year alone would support £270,000, so the multiple a lender applies matters as well as its reading.

Step 3. What makes each reading possible

The lower-year figure needs no explanation. The average needs the accountant's letter and a lender that averages explained falls. The current-trading figure supports either reading, but lenders still assess the annual figures, so it works as evidence alongside them. The add-back needs a lender that accepts it, and invoices showing the purchase. The van and equipment stay in the business and keep earning, which is the argument for treating the spending as investment, although whether a lender looks past a deductible business cost is set by its own criteria.

The other route is to wait. The 2026 to 2027 return can be filed from 6 April 2027, and the tax calculation for an online return can be printed 72 hours after it is sent (GOV.UK: get your SA302 tax calculation). If the full year confirms £58,000, a latest-year reading supports £290,000, and a two-year average of £45,000 and £58,000 is £51,500, which supports £257,500. A lender reading the lower of the two years would still read £45,000 until the following return, so waiting helps most with lenders that read the latest year.

What decides the case

Before applying, find out why profit fell and document it, show current trading, and choose a lender that reads explained falls. If the fall is real, size the loan on the lower year instead. Once the returns are filed the figures are fixed, and the open questions are the timing of the application and the choice of lender. If a lender has already declined the case, our declined mortgages guide covers the next steps.