Mortgages for Business Owners
When setting up a new business, owners often fail to consider the impact that being self-employed may have on their personal finance. In this article, we look at how to think ahead and maximise your options of getting a mortgage.
There’s no such thing as a ‘self-employed mortgage’, lenders offer the same mortgages to self-employed borrowers as they do to employed borrowers, however, it is important to know that they will assess an application differently and there are several areas worth considering.
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. Which one you pick will influence how lenders view your income.
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.
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.
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 useable income on an application.
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 – many lenders now accept income verification directly from a certified or chartered accountant.
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 now even work from only 1 year of trading. This often allows for more options and greater flexibility for borrowers to find a suitable mortgage.
If a company has been trading for multiple years the income taken and profits often fluctuate, for this reason, many lenders will take into account multiple years figures and average them to establish the income which can be used. For businesses showing growth, this is often detrimental to affordability, there are however lenders who will potentially consider the latest year alone if this shows a higher figure and allows for greater mortgage capacity.
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) contractor workers set up as a sole trader, some lenders will consider their gross CIS contract income rather than net profits, again often enhancing their affordability.
First Year of trading
In other cases, if you already have a mortgage and want to re-mortgage to save money but do not have any accounts available as yet, your existing lender may be able to help. They should be able to offer you a new mortgage product without requiring up to date evidence of income.
The Dos and Don’ts of Self-Employed Mortgages
- Keep up-to-date records and accounts.
- Hire a certified or chartered accountant to prepare your accounts and tax return.
- Speak to a mortgage broker about your options in the market
- 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.
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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.
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.
ThisisMoney.co.uk -Published: 10:55, 23 April 2013 | Updated: 17:21, 2 October 2015