What Happens If Your Most Recent Trading Year Is Lower Than Previous Years?

For self-employed applicants — whether sole traders, company directors or partners — mortgage assessments often feel more complex than they do for employees. Lenders rely heavily on trading history, business performance and income stability. So what happens if your most recent trading year is lower than previous years?

A dip in income doesn’t automatically prevent approval, but it does change how lenders calculate affordability and assess overall risk. This guide explains how lenders evaluate reduced income, what documentation they may request and what options exist across different types of lenders. This article provides general information only and does not offer regulated mortgage advice.

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Why Lenders Look Closely at Trading Trends

Lenders want to understand:

• Whether income is stable
• Whether the business is sustainable
• Whether the lower trading year was temporary or part of a decline
• If the most recent year reflects your true earning position
• How realistic future affordability is

A stable or rising income allows straightforward affordability, while a drop in income usually triggers additional underwriting questions.

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How Self-Employed Income Is Usually Assessed

The most common approaches include:

1. Average of the last 2 years’ income

Suitable when income is stable or increasing.

2. Latest year only

Some lenders use this when the latest year is higher.

3. Additional scrutiny when the latest year is lower

If the most recent year is lower, many lenders may:

• Use the latest year only, or
• Use a lower average, or
• Decline if the drop appears concerning

Approach varies across lenders and depends on context.

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Why a Lower Most Recent Year Is a Red Flag

A reduced trading year can suggest:

• Lower client volume
• Reduced revenue
• Rising business expenses
• Supply chain or market issues
• Temporary disruptions (e.g., illness, industry slowdown)
• Business restructuring

Lenders do not automatically assume a long-term decline, but they must confirm that the lower income still supports the mortgage.

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How Lenders Interpret a Dip in Your Trading Income

1. Size of the Decrease

A small decrease (e.g., 5–10%) is usually manageable.
Large decreases (20% or more) may trigger more detailed review.

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2. Reason for the Decrease

Underwriters examine explanations such as:

• Seasonal fluctuations
• One-off expenses
• Reduced working hours
• Contract changes
• Pandemic or economic impacts
• Investment into the business

A clear explanation helps lenders understand whether the drop is temporary or structural.

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3. Trends Prior to the Decline

If previous years show stable or growing income, lenders may be more flexible.

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4. Sector Risk

Industries with high volatility may face closer scrutiny.

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5. Company Director Considerations

If you draw dividends, lenders may review:

• Salary
• Dividends
• Retained profit

If retained profit remains strong despite a lower year, some lenders may still consider higher affordability levels.

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How High Street Lenders Typically Respond

High street lenders tend to be cautious when the latest trading year is lower.

Typical outcomes include:

• Affordability based on the latest year only
• Using the lower average of the last 2 years
• Declining if the decrease appears significant or unexplained
• Requesting additional documentation such as business bank statements, management accounts or accountant references

High street criteria vary but generally favour stability over fluctuation.

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How Specialist Lenders View a Lower Recent Trading Year

Specialist lenders may offer more flexibility, particularly when:

• The decrease has a clear explanation
• The business remains profitable
• Recent months show recovery
• Bank statement conduct is strong
• The applicant has a track record of responsible financial behaviour

Specialists use manual underwriting, allowing them to consider the wider context.

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Impact on Affordability Calculations

Affordability is based on verified income, not potential future income.

If your most recent trading year is lower, lenders may:

1. Use the most recent year only

This often reduces the amount you can borrow.

2. Use a lower 2-year average

Affordability is calculated conservatively.

3. Adjust loan-to-income multiples

Some lenders reduce the multiplier when income fluctuates.

4. Require a higher deposit or lower LTV

Risk is reduced by limiting the lender’s exposure.

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Documentation Lenders May Request

To understand the income dip, lenders may ask for:

• 2–3 years’ SA302s
• Tax year overviews
• Full accounts
• Management accounts (especially if income is recovering)
• Accountant’s reference
• Business bank statements
• Explanation of the income fluctuation

Clarity and consistency in documentation help support your case.

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How Bank Statement Conduct Influences Decisions

Lenders assess:

• Whether income flows are consistent
• Whether business invoices are regular
• Whether personal finances remain stable
• Whether overdrafts are used responsibly

Good conduct can mitigate concerns about lower trading income.

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Common Scenarios: How Lenders Respond

Scenario 1: Most recent year slightly lower due to a one-off cost

Often acceptable with explanation.

Scenario 2: Lower year due to temporary illness

Many lenders will consider if income is now stable.

Scenario 3: Lower year but retained profit remains strong

Some company director-friendly lenders may use retained profit in affordability calculations.

Scenario 4: 25% drop with no evidence of recovery

High street lenders may decline; specialist lenders may consider.

Scenario 5: Contract change reducing income temporarily

Underwriters may request updated contracts or management accounts.

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How to Strengthen Your Application

(General Information Only)

Many self-employed applicants choose to:

1. Have up-to-date accounts ready

Including management accounts if the business is improving.

2. Provide a clear explanation for the dip

A concise written summary often helps underwriters.

3. Show stable or improving recent bank statements

Demonstrates ongoing sustainability.

4. Ensure consistency across tax documents, accounts and applications

Avoids delays during underwriting.

5. Avoid unnecessary new credit

Keeps affordability clearer and reduces lender risk concerns.

6. Maintain strong personal banking conduct

Underwriters assess personal spending patterns as well as business income.

These steps support a smoother process but are not regulated advice.

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Summary

A most recent trading year lower mortgage application is still possible, but lenders will assess:

• How large the income decrease is
• Why it happened
• Whether the business remains sustainable
• Whether bank statements show stability
• How affordability is affected
• Whether high street or specialist lenders are more suitable

Even with a reduced recent year, many applicants successfully secure mortgages when their overall financial profile remains consistent and well-documented.

This article provides general information only. For personalised support, regulated mortgage advice is required.