Mortgage Insight: Mortgages for the self-employed

If you are (or about to become) self-employed, here are some hints on how best obtain a mortgage.

Record keeping

  • You should register the business with HMRC at the earliest opportunity. At the same time, register to submit tax returns online. You should put aside regular funds for income tax payments and not miss deadlines for submission of tax returns or payment of income tax due because, as well as resulting in unnecessary fines, this could cause problems with lenders when applying for a mortgage. Once a tax return is submitted, you should immediately request a copy of the tax return from HMRC as it can sometimes take two or three weeks to be delivered.
  • Lenders will expect to see that a business bank account is being used and that all income for the company goes into that account and your share of the income is then paid to your personal account as if it is a wage. Lenders may well ask to see business bank statements and will question unexplained deposits and withdrawals. In addition, if the tax returns/accounts are not current, lenders may look at (for example) the last six months’ business bank account statements to confirm recent business income.
  • You should engage the services of a qualified accountant or use bookkeeping software (there are plenty on the market) and keep accounts/books up to date. Most lenders are happy with self-assessment tax returns submitted online by sole traders but if the business is a limited company, lenders may want to look at annual accounts prepared by a qualified accountant in addition to tax returns.
  • You should keep all invoices, receipts, etc, in case any entries on the business bank statements or tax returns are queried by the lender.
  • If you are set up as a limited company contractor, copies of all contracts containing details of daily/weekly contracting fees should be kept, as lenders may require sight of these. Details of any upcoming contracts should also be retained as lenders may want to see these to satisfy themselves of continuing employment.

How will lenders assess income?

Most lenders will want to see a two- or three-year track record of self-employed income and will treat different set-ups in different ways.

  • Sole traders – Lenders will look at net profits.
  • Partnerships – Lenders will treat partners in a business in much the same way as sole traders, i.e. – they will look at the individual’s share of the net profit.
  • Directors of Limited Companies – Most lenders will take salary and dividends into account, but some will look at salary and net profits.
  • Contractors – Many lenders will look at contractors’ daily pay rates and will work out an annual income by multiplying by five (for weekly income) and then by 46 or 48 to obtain an annual income. However, some lenders will treat contractors as directors of limited companies, in which case, salary plus dividends or salary plus net profit will be considered.

What’s the best type of mortgage for a self-employed person?

Everyone’s circumstances are different, of course, and your Partner will discuss with you the most appropriate mortgage for your situation and requirements. However, it may be worth considering an offset mortgage.

If you are in a profession where your income is unpredictable, you could benefit from keeping funds in the offset account(s) during the good times and draw on the funds when income isn’t so readily available. In addition, you may use the offset account(s) to put aside money for future tax bills. All the time funds are in the account(s), you will be paying interest on a lower mortgage amount.

I have been self-employed for only one year. Will I be accepted for a mortgage?

Acceptance will depend on the loan size, the LTV (loan to valuation ratio), income multiples, credit search/score but there are lenders who may help.

I am a Director of a Limited Company. Are there lenders who will use my salary and net profit to work out how much I can borrow?

Yes, there are lenders who will consider this although the majority of mortgage lenders will look at salary and dividends.

My business has just had a particularly good year. Will lenders look at my most recent year’s figures?

Generally, lenders will take an average of the last three years’ figures but will sometimes take the most recent year if the profit is increasing. However, lenders may make certain caveats about maximum LTV and the difference between the latest year’s figures and the previous year.

My profit figure has declined over the last couple of years. Will I be able to get a mortgage?

Lenders obviously look at these cases more closely; they’ll want to see an explanation for the reduction and will require comfort that the profits will not continue to decline. A projection for the next year would be helpful in this regard but lending is likely to be based on the most recent year’s figures unless the cause of the decline (for example, a one-off purchase of expensive machinery) is not continuing.

I recently took my accountant’s advice and switched from being a sole trader to a limited company. Will this affect my chances of getting a mortgage?

There are fewer lenders who can consider this scenario but, as long as you have two- or three-years’ accounts record history, you should be able to get a mortgage.

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