Mortgages for Business Owners – Myth Busting!

There’s no such thing as a ‘self-employed mortgage’, lenders offer the same mortgages to self-employed borrowers as they do to the employed. However, it is important to know that they will assess an application differently and there are several areas worth considering…
BLOG1

How Your Business is Set-up
When you set up your own business you have a choice of three main business structures to choose from – the one you pick will influence how lenders view your income…

Sole Trader
As the name suggests, sole traders typically work independently. Keeping records and accounts is fairly straightforward – and you get to keep all the net profits. It’s these profits a lender will look at when assessing your income. This means that the higher your net profit, the higher the potential mortgage affordability will be for a lender.

Partnership
If you go into business with someone else, you might set up a partnership. When looking at your income, mortgage lenders will look at each partner’s share of the net profit. So, make sure you have accounts that clearly demonstrate this.

Limited Company
Setting up a limited company means you keep your business separate from your personal affairs. A limited company will have at least one director. Directors normally pay themselves a salary and withdraw any net profits as dividend payments. For limited company directors lenders will look at the following sources of income:

• Salary and Dividends – the majority of lenders will use a director’s salary and dividends to assess income.

• Net Profit – You may have net profits that you choose to retain in the business, rather than take out as salary or dividends. Some mortgage lenders can consider using retained net profits when assessing an application, along with your salary, which will often increase the usable income on an application.

credit-card-1104961__340
Proving Your Income
In order to prove your income you will need to be able to provide your lender with documentation to show any profits your business has made and the income you have derived from it. Lenders will normally request the documents below:

• Business Accounts – these need to be finalised and submitted to HMRC, often by a qualified accountant

• Self-Assessment Tax Calculations and accompanying Tax Year Overviews – these are provided by HMRC after submission of a personal tax return

• Accountant’s reference – some lenders will accept income verification directly from a certified or chartered accountant

Capture

Length of Time Trading
Traditionally lenders wanted a customer to have been in business for at least 3 years before they could consider an application, this is no longer the case. Many lenders will now work from a 2 year trading period and some will work with 1 years of trading figures.

If a company has been trading for multiple years the income taken and profits often fluctuate, for this reason many lenders normally use an average to establish the income which can be used. For businesses showing significant recent growth this is often detrimental to affordability, however some lenders will consider the latest year in isolation which allows for greater mortgage capacity.

Contractors
Many Contractors establish themselves as a business entity and pay themselves via a limited company, but often contract solely to one company. In this scenario some lenders will treat this income in a similar way to employed applicants and use the gross amount paid to the Contractor over their latest contract rather than company net profits, often enhancing their affordability.

This is also the case for Construction Industry Scheme (CIS) workers set up as sole traders, where some lenders will consider their gross CIS contract income rather than net profits, again enhancing their affordability.

The Dos and Don’ts of Self-Employed Mortgages;
• Do. Keep up-to-date records and accounts
• Do. Hire a certified or chartered accountant to prepare your accounts and tax return.
• Do. Speak to a mortgage broker about your options in the market
• Do. Speak to a mortgage broker about what your current lender can offer if you’re recently self-employed and want to re-mortgage

• Don’t. Minimise your income too much for tax purposes – it will affect your chances of getting a mortgage
• Don’t. Assume it’s impossible to get a mortgage if you’re self-employed – it’s not!
Live Credit Score. Totally Free!

Finding a Mortgage
A mortgage broker is invaluable when you are self-employed. They’ll know which lenders are willing to lend to self-employed, which take retained profits into account, if any lenders will accept less than two years of accounts and, most importantly, who will offer you the best rate. It is normally recommended to work with a Mortgage broker and your accountant to maximise your options.

Joanne Osborne is Director of Mortgage Advice Specialists Scarlett Financial Services – Talk to us today, we can help. Call 01233 800 555.

Scarlett Financial Services Ltd. is an appointed representative of Personal Touch Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. There will be a fee for mortgage advice. The amount will depend upon your circumstances but a typical fee would be £295, payable on completion of the process.

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>