Self-Employed Mortgages
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There is no exact product as a self-employed Mortgage.
Self-Employed Mortgages are similar to Employed Mortgages but can still be complicated. Over the years we have been approached by plenty of Self-Employed who have searched through the big high street lenders and been refused Mortgages. All because the bank did not understand their type of Employment. Disheartened and feeling left out of the mortgage market they call asking the following questions:
I am Self-Employed Sole Trader can I get a Mortgage?
If I only have 1 years Accounts, can I get a Mortgage?
I am a Company Director and have a good turnover, but do not take a huge salary, can I get a Mortgage?
And the answer is always Yes. Applying for a Self-Employed Mortgage is as simple as applying for a Mortgage being employed:
'The main rule for Self-Employed Mortgages is you need to prove your income'
What is Self-Employed?
Lenders will class you to be Self-Employed if you are a:
- Sole Trader
- Partner in a Partnership of Limited Liability Partnership (LLP)
- Contractor who has set up a Limited Company.
- Have more than a 20% share of the business (Ltd Co) which is your main source of income.
However, some Self-Employed situations can be complicated. For example, you could be a:
- Director of a Ltd company and have a PAYE position (NHS Consultants)
- Sole Trader with rental income from buys to lets in a Limited Company.
- Employed IT Analyst but also have an umbrella company for your Self-Employed IT contracts.
A competent Specialist Mortgage Broker will be able to deal with complex incomes and present your application to the right lender and get you a successful outcome.
How are Self-Employed Mortgages different to standard Mortgages?
There is no difference between the process for getting a Mortgage as Self-Employed and getting a Mortgage as employed. It’s only the Documents that are required to prove your income that are different.
What is a Sole Trader?
If you’re a sole trader, you and your business are legally the same person and all the nett profits (after expenses) belong to you.
When assessing your Mortgage Affordability it’s these net profits ( before Tax ) that a mortgage lender will be considering.
You will have accounts that you submit to the ‘Inland Revenue’ and a document called ‘SA302′ that will show your total income received and total tax due. Your lender will be likely to look at this information alongside your business accounts.
What is a Limited Company?
A limited company is a separate legal entity that is set up to run a business.
The people in charge (Directors) of a Limited Company will need to be paid and this can be done in a variety of methods:
- Salary
- take a percentage from the Profits (Dividends)
- A mix of both, salary & Dividends
However there are some Directors who due to personal circumstances do not need to take a salary or dividends and would prefer to leave the profits in the business. This is known as retained Profits.
When it comes to Assessing a Self-Employed Applicant For Affordability purposes some lenders will :
- only take into consideration the individual’s basic salary and dividends, so make sure you have a clear record of both of these for the last few years.
- look at your retained profit (the profit you keep in the business rather than paying out as salary or dividends).
- consider looking at your Nett Profits, only some before Corporation Tax paid and some after Tax.
So to say that Directors Mortgages can seem complicated is an understatement.
Self-Employed Mortgages as a Partnership or Limited Liability Partnership (LLP)
These are assessed in a similar way to a Limited Company Directors. However, Partnership Lenders will take into account each partner’s share of the profit. – So make sure your accounts clearly reflect this share.
Expert Tip
Please note that all Self-Employed Lenders will need to see your latest business accounts. This is to ensure that the Limited Company/Sole Trader/Partnership is operating profitable and is stable, so it’s important to keep them up to date.
In addition all Lenders will also be looking to see if your income has increased or decreased in recent years. If it has increased, they may take the average income for the past two or three years into account. However, if it has decreased, lenders might look at the latest and lowest figures instead.
What documents do you need for Self-Employed Mortgages?
Documents a Sole Trader will need for Self-Employed Mortgages will generally be
- your most recent and the preceding complete tax year Accounts for your income.
- SA302s & Tax Year overviews
- Some lenders will accept an Accountants self-employment letter for Mortgage
- Last 3 months Business Bank Statements showing Turnover
Documents a Director will need for Self-Employed Mortgages will generally be
- Your most recent and the preceding complete tax year accounts for your income. However, we can get mortgages for self-employed with 1 year accounts.
- The accounts should evidence the Directors Salary, dividend payments or retained profits.
- Tax Year overviews.
- Some lenders will accept an Accountants self-employment letter for Mortgage.
- Business Bank Statements showing Company Turnover,
- Details of Limited Company ie Company Registration number, details of all directors & shareholders.
Expert Tip – The Limited Company information on your application form should reflect the information on Companies house.
Does being a Company Director affect a Mortgage application?
No, being a Company Director will not affect your Mortgage application, as with all mortgages it is down to 3 key areas : Income, Deposit & Credit report. (The 3 factors to getting Mortgages)
What Income do lenders use to assess affordability for Company Directors?
This is the area in which borrowing as a Company Director perhaps differs most from a Employed Mortgage applicant.
Whilst running their business a competent & responsible Director will seek advice from their accountants to make sure the company is run in a tax efficient manner and they are using all the allowable tax breaks. For example:
- Depending on the Directors needs, retaining profits within the company structure and saving on tax.
- Depending on tax efficiency spreading the Directors renumeration between salary and dividends.
As good as the latter are for reducing your tax bill, they can be detrimental from a Mortgage viewpoint, Choosing the wrong method can seriously reduce your maximum borrowing ability.
Most of the High Street Lenders will consider only money that you have drawn from the company to be your income. Therefore, most Lenders when assessing a mortgage application by a company director, will take account of the salary taken from the company plus dividends .
There are now Specialist Lenders who will instead consider you share of the companies net profits:
- before Corporation Tax as your income.
- after Corporation Tax as your income.
This can make a considerable difference in affordability calculation and the maximum loan amount available.
Salary vs Retained Profits
The following is an example of how the two methods of working out your income can significantly affect the amount you might be able to borrow.
Let’s say your share of the company’s net profits are £150,000, but you only draw salary and dividends totalling £40,000. If we assume an income multiplier of 5, then a lender basing your income figure on salary plus dividends would lend a maximum of 5 x £40,000, i.e. £200,000.
A specialist Self-Employed Lender basing their income figure on share of net profits, on the other hand, would lend a maximum of 5 x £150,000, i.e. £750,000.
This is a vast difference, so it pays to speak to Specialist Self Employed Lenders.
How much can a Company Director borrow?
All Lenders will base the maximum total borrowing on a multiple of your verified income. Multiples fall broadly in the range of about 4 to 6 times.
Each Lender will have their own company criteria and will also look at the individual case. For example, a higher amount of deposit, good customers credit file and strong accounts could mean higher lending. Lower Deposit and Bad Credit profile could mean reduced loan amount.
Do you do Director Mortgage Reviews?
Yes, we can take a quick review of your personal situation, All we will need is 20 minutes and details of your earnings, debts, credit rating and deposit and we can provide you with an overview of your possible borrowing power.
Self-Employed Mortgages need expert advice. Call us for a non-obligation chat to discuss your Self-Employed Mortgage or Remortgage options.
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