2015 guide on getting a Mortgage for self-employed applicants. A must read for all entrepreneurs looking to buy property.
Following the regulatory mortgage market review (MMR) last year the lenders have implemented changes to the way they assess self-employed income. MMR requires lenders to ensure future income is ‘sustainable’, past performance serves a good guide, but does not necessarily ensure future earnings so Mortgage for self-employed applicants have become more complex.
This is a big departure from the heady days of ‘self-certification’ where you could effectively write your own ticket, a process which had already been outlawed prior to MMR.
So why does this further tightening of the screw to lending criterion entail for the self employed who are looking for mortgages?
The better news is not all the lenders have not interpreted these new directives as literally as others, and as you would expect Niche can guide you to the most appropriate avenue for your own personal self employed mortgage requirements.
Working from your last year’s accounts
The vast majority of UK mortgage lenders based their calculations on an average of two or three full years figures, be that on accounts or SA302s (self assessment confirmation from HMRC). And, to adhere to the ethos of MMR they might also extend this to the provision of a projection for the next tax year.
Therefore, in short, minimising your declared income for tax efficient purposes is not usually the best way to go for the years preceding your purchase.
If the profits are on a downward spiral then they based affordability on the latest year and the lenders’ will probe more into your financial well-being and the company’s sustainability.
Plus other side: if your latest figure is good; and there is a progressing trend; we have lenders that can look to base affordability on that figure. If you times it by 5 you have an indication of the maximum the lender will lend.
Working on your daily rate
If you are a contractor, say an IT contractor, we can obtain a mortgage based on your daily rate. The options are greater in you are contracted to just one employer but either way we can help. This generally means the amount you can borrow is far greater than using the tax efficient figures in your accounts.
This has look been a bugbear of mine. Most lenders do not consider money left in the business i.e. not drawn. They instead believe it must have been left in the business to make it sustainable and therefore is disregarded in the income assessment for a mortgage.
In the case of Limited Companies this argument becomes harder as effectively the ‘Company’ is a separate entity from the ‘individual’. However, there are still a few lenders that take the broader view and can include retained profits in their assessment, and this additional income could make the difference between your dream home or a compromise. Please bear in mind the maximum mortgage will be limited to 4 times the combined salary and retained profit figure in this instance.
Following MMR most lender’s now look to SA302 figures for confirmation of property income. In some respects this is sensible as it demonstrates the profit after all deductions (such as management fees, maintenance, service charges etc.) but in reality it is not representative. How so? Well you could have added or sold properties in your portfolio since the last return and in my experience nearly all landlords over egg their expenses to drive the tax down.
Depending on the lender they will either take 100% or 50% of the SA302 figure. Again they might want to average this out over a 2 to 3 year period. There are some lenders that will not take any of it for properties with a mortgage on them – so be careful and seek professional mortgage advice, such as that from Niche Advice, before applying.
Other sources of income such as pensions contributions, overseas income, offshore income
There are no ‘hard and fast rules’ on other types of income. Regular contributions to pensions may be seen as ‘discretionary’ spend and can be factored back in, depending on the lender.
As a general rule foreign income is ‘not liked’, unless it can be attributed to overseas property lets.
Offshore income derived from in trusts or places like Jersey and British Virgin Islands, normally can only be used if you are ‘high net worth’ and willing to deposit £100,000 into investments to push the mortgage through with the lenders.
I hope this article is been useful we deal with hundreds of self-employed applicants every year and what I can say is every case is different and it’s vital you seek professional mortgage advice.
For more information on our range of self-employed mortgages please complete the enquiry form on this page or alternatively call us on T: 020 7993 2044.
Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Finance Brokers In London. His role is very much focused on Property financing both on residential and commercial lines.