There has been a surge of people setting up their own businesses in the last few years. These could well have been people who were previously in the corporate world. With a nice basic salary, and the various other perks of a stable income, getting a mortgage may not have been much of an issue.
You have had enough of the nine to five though and you are sick of the boss nagging you so you have gone out on your own. I’ll bet you didn’t think about what would happen when your mortgage deal came to an end though did you? Or if you are thinking of buying have you considered how a mortgage company will view you?
Did you know that if you are a company director looking for a mortgage (i.e. you have set up a limited company that you are employed by) then lenders will consider you as self employed? Many people contact me saying they are employed by their own company and think that it is just a case of producing payslips, this is not the case, you are still looking at a self employed mortgage.
Here are some simple tips for you, general rules of thumb when it comes to self employed mortgages:
- Generally you will need two years worth of company accounts (although you can get a mortgage with just one year’s worth)
- Lenders take an average of the last two years if profit is increasing.
- Lenders will take the most recent year if profits are lower than the previous year
- Company Directors can use salary plus dividends to work out what they can borrow
- Get your SA302 documents from the inland revenue, ask your accountant to help
- You may be asked to produce three months business and personal bank statements
- Your accountant may need to provide a reference
I have just started a business, can I get a mortgage?
In short, no. Before the credit crunch there was a proliferation of self certification mortgages for the self employed (and others). Once upon a time you could tell a lender how much you were bringing in and they said “OK, here’s some money”. As we all saw with the recession, that was financial services led, this was not sustainable. Therefore please bear in mind if you are about to go it alone you might not be able to change your current arrangements or start any new ones for a while.
Can I get the same deals as my employed friends?
As long as you qualify then the deals you can get will be the same as everyone else has access to. Some lenders have different criteria when it comes to assessing self employed mortgages or company director mortgages. Therefore it is dependent on how long you have been running your business and how much you want to borrow but essentially it is true that you can still get the attractive “high street” mortgage deals like everyone else.
As with all residential mortgages the lender will have an affordability calculation they will use to assess your borrowing capability, so things like loans, credit cards, dependents etc will be taken into consideration.
I want to keep my profits down so I don’t have to pay so much tax
Well that is between you and your accountant to sort out but you can’t have it both ways. If you are taking minimal dividends and salary you cannot expect to be able to borrow significantly inflated amounts of money, even if you say you can afford it.
Self Employed Mortgage – Case Study
Mr & Mrs B: Mr B is a limited company director with a nine year trading history, he has up to date accounts but two years ago profits were down on the previous year although they returned to “normal” levels in the most recent trading year. Mrs B is employed part time and has worked for the same company for over 10 years. They have two children and no adverse credit history. They would like to borrow as much as possible to enable them to buy a new home that is in need of some updating.
Not an untypical situation where one half of a couple is running their own business and the other is employed. The issue here is that Mr B suffered a drop in profits two years ago and generally mortgage companies will look at an average of the last two years figures. As they needed to borrow the maximum amount possible so they could fund the purchase and updating work required the mortgage was placed with a company that looked at three years history. The advantage here was that is made the average higher so the “blip” in profits affected the final borrowing figure less.
The lender took Mr B’s salary (often directors pay themselves a low salary and top up using dividends) from his latest set of accounts then took the average of the last three years’ dividends. The accountant was also asked to provide confirmation of these figures along with a projection for the current year to reassure the lender that the profit was sustainable. An 80% LTV mortgage was agreed at a rate of under 2%. The mortgage enabled Mr & Mrs B to purchase the house they wanted and have some money to carry out some of the updating. Although the amount wasn’t quite enough to fulfill all their grand plans it enabled them to make a start. They can look at another mortgage to fund home improvements when Mr B’s profits are sustained for more than two consecutive years.
No two enquiries from the self employed are the same so it is difficult to paint a picture here that will apply to everyone but hopefully this has been useful, if you like the post please share it!
Until next time.