Self Employed Mortgages
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One of the main issues we seem to come up against with self employed clients, is the income that lenders will use to assess the affordability of the mortgage, and ultimately the amount that the client can borrow. The common misconception is that the income figure that the lenders will use is either the ‘turnover’ or the ‘total gross profit’ of the business. This is not correct.
The figure they use will firstly depend on whether the client is a ‘sole trader’ or a ‘limited company director’ So, for a sole trader, the figure that lenders will use is the ‘net profit’ after deductions and expenses. This is the figure that the clients’ tax is calculated on. It can also be a lot lower than the gross profit, which then makes a big difference to the amount the client could potentially borrow
Example £100,000 gross profit, minus salaries and costs, leaves £20,000 net profit. For a limited company director, the figures ‘generally’ used are the director’s salary, and then the dividends taken from the business.
Self Employed Mortgages by Lawrence Chalk at Trinity Finance
There are also a few lenders who would use the director’s salary and the retained profit in the business, rather than the dividends, so if that is higher, it can increase the borrowing potential.
There are a few different ways to prove the income figures for the lenders, and this does depend on the individual lender as to what they require. Some would want the full signed accounts, for the most recent 2 or 3 years. Although there are a few lenders that can lend based on having just one full years accounts. Some lenders would send their own accountant certificate to the client’s accountant, and then the accountant can fill this in, sign it and return it to the lender.
And some would want the tax calculation forms with the accompanying tax year overviews, which the clients should be able to download directly from the HMRC website, once the accounts have been fully submitted. So as you can probably see it’s a bit of a minefield when it comes to working out the borrowing potential of self employed applicants. But our job as your adviser, is to find out all of the facts and figures and then select the best lender based on the information and documents provided
So if you are self employed and would like some free advice, please feel free to contact one of the team here at Trinity Finance, and we will do our best to help you