Jeni Browne, head of residential and buy to let lending answers some of the top questions asked by self-employed people, contractors and business owners looking to get a mortgage.
Before I get stuck in, I would like to dispel the myth that its hard to get a mortgage if you are self-employed, or that you need to have at least 3 years figures. NOT TRUE. Hopefully below will give you a better picture, but as always, we are happy to chat things through with you so give us a call on 0345 345 6788.
What is income?
For sole traders this is simple, income is the ‘net taxable’ figure on your tax return. I.e. your income less your expenses. Lenders generally work in a couple of different ways: taking an average of the last two years; taking the lower of the last two years, or just using your most recent years’ figures.
Company directors are trickier. Traditionally, Directors will pay themselves a salary plus a dividend which would show on your tax return. However, some lenders will work on the profit of the business as long as you own all of the company. The logic is that whilst you may not have drawn all of the profit out of the business as a salary or dividend, you could have done and, as you own all of the company and the shares, you have final say on whether you do or don’t do this. So, in this instance a lender will look at the net profit plus the director’s salary. Again, if over the last two years, the most recent year is the lower, they work on this, if it’s higher they average over the two, although occasionally some will accept the last year’s figures regardless.
With me so far?
How many years figures do I need?
One year. We would need one years’ worth of accounts or a tax return to be able to help, anything more than this is, frankly, a bonus.
Do I get charged a higher rate?
Nope. The more complex your situation, the fewer lenders there will be to choose from, but this doesn’t necessarily mean it’s expensive. Each lender has their own peculiarities in terms of what they will and won’t do – it’s our job to know what these are and find the best mortgage for our client’s needs. Over 80% of our residential business still goes to the high street lenders, and over 80% of our business is for clients with complex income structures.
How much can I borrow?
Now this is a tricky one to answer as all lenders use affordability models these days. However, as a guide, if you take your income (as set out above) and multiply this by 4.5, you will be inside of most lenders criteria – some push up to 4.75x, and there are still a few stragglers who will get you to 5x.
What if just some of my income is from self-employment?
OK, so if you’re an employee, but also do a bit of something else on the side (e.g. letting property, consultancy work, or (one of my personal favourites), professional clown), lenders will take all of your PAYE income and usually add 50% of your self-employed income.
I just went Ltd from sole trader, is this a problem?
This is one we see quite a lot – when one incorporates and all of sudden they don’t have two years Ltd Co accounts and think they can’t get a mortgage. The reality is that many lenders are pragmatic about this and, as long as your accountant can confirm that you have remained in the same line of business, they will accept the sole trader income as per the tax return.
What if I work as a contractor?
For those who contract and have been doing so for at least one contract renewal, I have good news for you. Some lenders will use your contract day rate pro rata’d to working 46 weeks per year, rather than taxable income which can put you in a stronger position for the amount you can borrow.
Hopefully this little run down is helpful. Needless to say we do mortgages for employed people, and we are rather good at these too!