Frozen thresholds and rising costs are quietly tightening the screws on SME and self‑employed borrowers
The dust may have settled on Labour's Autumn Budget, but for self‑employed borrowers and SME directors, the impact is only just beginning to work its way through the mortgage market.
On paper, the Chancellor has framed her plans as “fair and necessary” and firmly pro‑growth. On the ground, brokers say the reality is far more nuanced: a slow tightening of the screws on disposable income and business resilience, which in turn feeds directly into mortgage affordability and underwriting appetite.
As Nicholas Mendes (pictured right), Mortgage Technical Manager at John Charcol, puts it, the story here is not a single shock but a series of accumulating pressures: “For SME owners and self-employed borrowers, the Budget’s impact is less about dramatic policy changes and more about the cumulative squeeze created by frozen thresholds, rising operating costs and tighter tax planning space. Many small business owners were already feeling pressure on disposable income after a difficult trading period, so any measure that reduces take-home pay or increases overheads will feed directly into mortgage affordability.”
A confidence hit for business‑owner borrowers
Few parts of the housing market are more exposed to that squeeze than the segment that relies heavily on business‑owner applicants. For these clients, policy tweaks on tax and costs don’t sit in isolation – they land on top of years of turbulence, from Covid to inflation, higher rates and softer demand.
“Uncertainty around corporate tax or business rates can make self‑employed borrowers and SME directors more cautious,” says Jana Chetraru (pictured left), director and mortgage broker at BTJ Mortgages in Enfield. “If profits look less predictable, lenders may view their income as higher‑risk, potentially tightening affordability assessments or requiring more evidence of stable earnings. This can delay purchase decisions, reduce borrowing capacity, and generally cool activity in parts of the property market that rely heavily on business‑owner applicants.”
The psychological impact is what's most crucial. Even where the headline measures are less severe than feared, the overall message to small businesses has been one of higher scrutiny and limited room to manoeuvre. Faced with that backdrop, many directors are opting to conserve cash, keep trading decisions under review and delay big personal commitments like moving home or upsizing.
"Caution, not contraction" from lenders
READ MORE: Transactions steady as markets shrug off Budget jitters
The good news – at least for now – is that lenders are not slamming the door on self‑employed and SME‑backed borrowing, though they are increasingly looking for reassurance that earnings can withstand whatever the next year or two brings.
“From a lender perspective, the direction of travel is caution rather than contraction,” Mendes says. “Lenders are unlikely to change policy explicitly because of the Budget, but they pay close attention to profitability and income stability when assessing SME and self-employed cases. Where tax thresholds remain frozen and costs rise, net profits can flatten even when the business is performing solidly. This can make affordability look weaker on paper, and we may see underwriters interrogate income trends more closely over the next year.”
That interrogation can play out in several ways: extra years of accounts, more questions around sector exposure and pipeline, or a sharper focus on how directors choose to remunerate themselves. For those who have relied on taking relatively modest salaries and flexible dividends, the bar is rising.
“For directors who pay themselves tax‑efficiently, maintaining or increasing dividends becomes more important if they want to preserve borrowing capacity,” Mendes adds. In other words, tax‑efficient does not always mean mortgage‑efficient – and the Budget’s freeze on thresholds only amplifies that trade‑off.
Affordability on paper versus reality on the ground
This disconnect between the business reality and how it appears on an underwriter’s spreadsheet is where brokers are earning their keep.
On one side, you have SMEs that are trading acceptably well in a tougher environment, but seeing profits capped by rising input costs, wage pressures and frozen tax bands. On the other, you have lender models that often privilege clean, upward‑sloping profit trends and stable drawings.
Chetraru warns that, in this climate, any hint of volatility can be penalised: a dip in one year’s profits, a delayed contract, a conscious decision to reinvest in the business. “If profits look less predictable,” she notes, lenders feel justified in tightening affordability or asking for more evidence of stability. That doesn’t always mean a declined case – but it can mean lower maximum loans or tougher stress tests.
For borrowers, the effect is subtle but real. They may still get a mortgage, but not quite at the level or on the terms they had anticipated. For the market, it shows up as fewer stretched moves, more clients sitting tight, and a cooler patch in precisely those sub‑markets – growing suburbs, regional hubs, higher‑value family homes – where entrepreneurial income is most prevalent.
Preparation is becoming the key differentiator
Looking ahead to 2025/26, brokers aren't expecting lender appetite for self‑employed borrowers to disappear, but they are warnging that the hurdle is getting higher. Preparation will increasingly look like the difference between a smooth “yes” and a frustrating “not quite”.
“[There will likely be] an even greater emphasis on stability: clean year-on-year profit trends, low business debt, and clear explanations for any volatility,” says Mendes. “For borrowers, the most valuable move will be early preparation, up-to-date accounts, and a clear picture of year-end performance.”
That means conversations starting earlier in the financial year, not a last‑minute scramble once a dream property has been found. It means directors thinking carefully about how they structure income and dividends, and SMEs reducing unnecessary credit where possible. For brokers, it means engaging more directly with accountants and bookkeepers to make sure the story in the numbers matches the reality of a resilient, viable business.
In that sense, Reeves’ Budget may not have redrawn the mortgage map for SMEs overnight. But by tightening the fiscal environment while leaving the heavy lifting on growth to businesses themselves, it has tilted the balance further towards caution – among borrowers and lenders alike.
In the months ahead, the brokers who thrive will be those who can translate that caution into constructive advice: helping SME clients navigate the cumulative squeeze, present their income in the best possible light, and move when both the policy and the numbers finally stack up.
