Mortgage Tips for the Self Employed
Written on 5 March 2014 by
With the 2014 budget approaching, our mortgage expert Alistair Hargreaves looks into how best for self employed clients to demonstrate their true earnings potential when looking at a new mortgage. Please note, this is not designed to provide tax advice – please seek advice from a relevant tax professional for your own situation.
I often receive phone calls that start out I’m self employed and I don’t think that I can get a mortgage. Such has been the perception of the tightening of lending rules for those who run their own company that many clients feel that a mortgage is out of reach unless they have payslips and a P60. It certainly is harder to arrange a home loan than it was before the recession, but not impossible
If you are self employed, either as a sole trader, a member of a partnership or as a director in a limited company, getting a mortgage in line with your income can sometimes prove quite difficult. If you are working with a tax adviser they will be looking at ways to make sure you do not pay more tax than you are obliged to. This may mean for example as a limited company you might choose to keep money in your company as retained profit rather than drawing it down. However, from some lender’s perspective that money is the company’s asset, not yours, and so cannot be taken into account when assessing your ability to afford a mortgage. However, some of the more flexible lenders out there will use that retained profit when working out your income, on the basis that although you have not drawn on it, it is still yours and can be taken out whenever you want to.
The key to making sure that you can demonstrate that you have access to sufficient income for your new venture is communication. Talk to your mortgage broker to get an idea of the income you need to be showing for your planned borrowing, and talk to your accountant to make sure that this is possible.
Gone are the days when we could offer clients a self certification mortgage, where an applicant would just sign to confirm that they could afford the repayments. The emphasis now is very much on affordability – ensuring that a client can afford the repayments, both now and in the future. So working more closely with your professional advisers is even more important than before, because striking the right balance can make a very big difference.
It is also about long term planning – the majority of lenders will average out self employed earnings over two or three years, so having one bad year can have quite an impact. There are a few banks and building societies, though, who will only look at your last years’ accounts, but only if your income has increased. If there are some big increases or decreases in revenue, net profit or expenses these will be questioned.
Essentially an underwriter wants to understand the story of a company. They want to make sure any income is sustainable and sensible. Therefore, having a track record over five plus years certainly helps; or, sufficient experience within your industry in an employed capacity before moving into a self employed role.
Obtaining a mortgage when you are self employed is all about planning and communication between you, your accountant and your broker. You have to make sure that your income is at the right level, at the right time, and presented in the right way for an underwriter to be happy with it. If you want further advice about obtaining a mortgage whilst self-employed, or any other mortgage related issues, please contact me using one of the following ways:
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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.