What Happens if Your Most Recent Trading Year Is Lower? Your Mortgage Guide

Self-employed income rarely stays exactly the same from one year to the next. Market changes, reduced demand, illness, contract endings, or business investment can all affect profitability. But if you’re applying for a mortgage and your most recent trading year is lower, lenders will focus heavily on this when assessing affordability.

This guide explains how lenders treat declining self-employed income, what documents they review and what your options are if your latest year’s figures reduce your borrowing potential. This article provides general information only and does not offer regulated mortgage advice.

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Do Lenders Accept Mortgage Applications When the Most Recent Trading Year Is Lower?

Yes — but the lower year becomes central to the assessment.

Most lenders use the most recent year’s income if they see a downward trend. Their main concern is whether:

• The lower income is temporary or ongoing
• Your business is stable
• You can comfortably afford repayments on the lower figure
• There is sufficient evidence of recovery

A fall in income does not automatically stop a mortgage, but it often limits affordability and reduces lender options.

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Why Lenders Focus on the Most Recent Year

Declining income can signal:

• Reduced demand for your services or products
• Business restructuring
• One-off loss of a major contract
• Health-related time away from trading
• General market downturn

Lenders look for signs that the drop is explained and manageable. Stability is key.

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How Lenders Assess Self-Employed Income When the Most Recent Year Is Lower

1. Using the Latest Year Only

If the most recent trading year is significantly lower than previous years, many lenders will:

• Base affordability solely on the latest year’s profit or drawings
• Ignore previous higher years for income calculations

This typically reduces the maximum loan size.

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2. Assessing the Three-Year Trend

Some lenders compare:

• Year 1
• Year 2
• Year 3 (most recent)

If Year 3 is lower but still part of a stable long-term pattern, they may use an average — but only if the dip is modest.

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3. Asking for an Explanation

Lenders may request:

• Accountant’s commentary
• Notes on the cause of the decline
• Confirmation that income is stable
• Evidence of renewed contracts or bookings

Clear documentation helps lenders understand the story behind the figures.

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4. Reviewing Bank Statements for Stability

Even if accounts show a decline, lenders check bank statements for:

• Consistent cash flow
• Regular deposits
• No reliance on overdrafts
• Sustainable spending
• Strong financial management

Good account conduct can offset concerns.

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5. Considering Forward-Looking Evidence

Some lenders accept:

• Pipeline work
• Contracts for the upcoming year
• Confirmed retainer agreements
• Renewal letters

This is especially relevant for contractors and consultants.

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How Lenders Treat Different Types of Self-Employment

Sole Traders & Partnerships

Lenders usually assess:

• Net profit from SA302s or tax calculations
• Whether the latest year’s profit is sustainable

A lower year typically means affordability is based on that lower figure.

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Limited Company Directors

Assessment may be based on:

• Salary + dividends
• Salary + net profit
• Salary + retained profit (specialist lenders only)

If the most recent year’s net profit is lower, the lender may use the reduced figure, even if the business has retained earnings.

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Contractors

For contractors on day-rate models:

• Lenders may use contract value rather than accounts
• A recent reduction in work or contract breaks may affect treatment
• Renewals and continuity are vital evidence

Sometimes contractors avoid issues if they can demonstrate uninterrupted engagement.

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Common Reasons for a Lower Trading Year (and How Lenders View Them)

1. Loss of a Major Client

Lenders want reassurance that income has been replaced or is being rebuilt.

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2. Illness or Time Away from Work

Evidence of returning to normal trading can help.

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3. Business Investment

Lower profits due to reinvestment may be acceptable if bank statements show strong turnover.

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4. Market Volatility

Some sectors fluctuate naturally — construction, creative industries, consultancy, etc.
Lenders familiar with the industry may take a more flexible approach.

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5. Economic Downturn

A broad, sector-wide decline is often viewed differently from a business-specific issue.

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How a Lower Most Recent Year Affects Affordability

1. Reduced Borrowing Capacity

Because affordability is usually based on the most recent year:

• Maximum borrowing is lower
• Lender choice may narrow

This is the most common impact.

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2. More Manual Underwriting

Lenders may:

• Refer the case to an underwriter
• Ask additional questions
• Request more documentation

Manual underwriting can help if your case is strong.

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3. Additional Evidence Required

This may include:

• Accountant’s letter
• Projections
• Contract renewals
• Explanations for dips

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4. Delayed Application

Some applicants choose to wait until income normalises if they expect a stronger financial year ahead.

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How to Strengthen a Mortgage Application When the Most Recent Year Is Lower

(General Information Only)

First-time or experienced self-employed borrowers often take the following steps:

1. Gather Strong Documentation

Include:

• Full accounts
• SA302s/tax calculations
• Accountant commentary
• Bank statements
• Contracts or pipeline work

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2. Demonstrate Current Stability

Recent invoices and bank deposits showing strong current-year trading help considerably.

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3. Keep Credit Conduct Strong

Avoid:

• Late payments
• High utilisation
• Unarranged overdraft use

Clean conduct reassures lenders.

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4. Reduce Personal or Business Debt

Lower commitments increase affordability.

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5. Consider Lenders Familiar With Your Sector

Some lenders specialise in complex income and fluctuating self-employment.

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6. Lower the Loan-to-Value (LTV)

A lower LTV increases lender choice and reduces risk.

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Common Scenarios and How Lenders Respond

Scenario 1: Income dropped slightly but remains stable

Some lenders may average income over two or three years.

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Scenario 2: Income dropped significantly year-on-year

Most lenders use the lower figure to calculate affordability.

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Scenario 3: A temporary dip due to illness

If income has already recovered, lenders may consider recent bank statements and accountant confirmation.

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Scenario 4: Business invested heavily in equipment

Turnover and pipeline evidence can help strengthen the case.

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Scenario 5: Contractor with a long-term contract despite a lower accounts year

Day-rate lenders may focus on the contract rather than accounts.

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Summary

If your most recent trading year is lower, lenders will usually base affordability on that reduced income. They focus on:

• Stability and sustainability
• Evidence of ongoing work
• Explanation for the decline
• Bank statement conduct
• Industry trends
• Forward-looking financial prospects

Although borrowing capacity may reduce, many applicants are still approved with the right supporting documentation and clear financial stability.

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