If you are self employed or run a limited company then the game to find the best mortgage deals have an added layer of complexity! Not that the self employed mortgage deals are any different, they aren’t. It’s just the lenders criteria can be very specific and it’s easy to trip over and get it wrong! So make sure you don’t and read on to learn more.
Self employed mortgage assessment:
Lenders have specific criteria when assessing income and these not only vary from lender to lender but also it can depend what you are looking to do, and whether it is a residential or buy to let mortgage.
It can't be underestimated how different lending criteria is between lenders and it is critical that people realise this. Click To Tweet I would love to say comparing mortgage lenders is like comparing apples with apple, but its really not! Literally the easiest way to describe this is by saying; I can almost guarantee there will be plenty of cases our research team look at this week, where a lender literally won’t lend to a client. Literally the lender will say ‘no we don’t like the clients circumstances’, while other lenders will view these same clients completely differently and say ‘yes’.
Yes and no are the extremes of course but between those extremes and even where a lender says ‘yes’, you’ll also get a huge difference in the borrowing amounts that a lender will lend. You think that all lenders lend the same amount? You have no idea! Click To Tweet
Literally the same person doing your very job, earning the same income as you will highly likely be able to borrow a completely different figure to you (and that’s with the same lender, let alone a different lender). This is all because their debt position may be different, they might have another property in the background, they might be married with one child, two children, or 5 children! They might be divorced, they might have maintenance payments to make, they may have chosen to take out a bike to work loan out, they maybe contributing more to their mortgage than you, they might have had a missed payment on a credit card, whatever…there are so many nuisances and things that make our own circumstances unique. And all this really does matter and makes a difference.
So this is hard enough when working out an employed persons options, but when it comes to the self employed there is even more complexity and nuances. Click To TweetAn example of this is not even the way lenders assess income, but how the conduct of the business has been! Virgin for example will flatly decline, if you’ve had a negative balance sheet in the last 2 years, even if the income is good!
Then you’ve got lenders who view self employed income very differently depending if you are a sole trader or partnership and limited company.
Oh and for those limited companies out there, I know you are an employee (of your limited company) but if you’re percentage shareholding is over a certain amount (and this figure varies from lender to lender) then they will treat you as self-employed.
Self employed mortgage nuances – Sole Traders and partnerships:
All lenders will assess someone who is a sole trader or in a partnership by assessing their net income. However the difference will be the documents they require to assess and evidence the income. For example one lender might want your accounts, while another lender may chooses to asses your SA302’s. What might surprise you, is that legitimately the income figures could be completely different! Click To Tweet
You ask why?
If you consider that a self employed person might have their financial year ending at a different point to the tax financial year, then you will get different figures. So deciding which lender to use and what documents they will require to best help you is part of the complexity of working out which lender is best.
To get the best mortgage deal, lenders are interested in two figures:
- gross profit
- net profit
The net profit is crucial (and this is what you pay tax on). If an individual’s gross income was £200,000 and yet there net profit was £6,000, the lender would base the borrowing on the £6k, not the £200k. As mad as this may seem, there is little point in arguing about it. It’s better to spend the energy on finding the right lender rather than wasting time and money with the wrong one.
Self employed mortgage – the complexity of limited companies:
Much in the same way that things can vary for the self employed depending when the year end dates run and whether accounts or SA302’s might be better to use. Mortgage lenders also use different elements of limited company income to decide how much they will lend on a self employed mortgage.
To get the best mortgagee deals, lenders will assess your income based on:
- salary and dividends only
- Other lenders will consider your salary and retained profit.
However, why should a director have to withdraw dividends when they either don’t want to, or don’t have to. They may wish to keep the profits in the business. In which case these limited company directors might end up being really restricted in terms of the amount they can borrow. The good news there are lenders who assess their income differently. These lenders will tend to assess based on salary and net profit.
However this can get further complicated as some lenders use net profit before tax while others will use net profit after tax!
The point hopefully has been made that the income you earn can and most likely will be different depending which lender is the best fit for you!
Why an independent mortgage broker can help get a self employed mortgage?
Having a specialist mortgage broker who is experienced with helping lots of self employed people, will only help you. They will be able to grasp your self employed situation and understand your circumstances. It will mean that you may avoid making costly mistakes! Click To Tweet
The bottom line is they will make sure you get the best self employed mortgage deal, but what does this actually mean!
It might mean you don’t waste your own time by dealing with a mortgage lender yourself successfully or not! It might avoid you paying excessive fees, excessive interest rates, or just reduce the amount of paperwork needed and therefore the time you need to spend away from your business sorting out your mortgage.
A good mortgage broker will be happy to talk to your accountant and know the questions to ask to get the necessary paperwork from them and how to package and present it to each individual mortgage company.
If you are self-employed the different criteria from one lender to another is vast and lenders typically require one or more of these:
- 3 years accounts
- Some require just one year accounts.
- Other lenders may want an accountant’s reference.
- Some require SA302’s.
Complexities of self employed mortgage criteria to be careful of:
To get the best mortgage deals, some lenders will take your latest years accounts, while others will take an average of 2 or 3 years.
Others lenders will take an average but if the latest years accounts are lower, then they will take this into account. Equally if the figures for the last 3 years have shown a downward trend, then potentially a lender may decline it altogether! But remember every lender is different and criteria is always changing. Click To Tweet
The other complication to find the best mortgage deals, is depending when your financial year end is, some lenders have an 18 month window. Others are more flexible in terms of accepting last year’s accounts as the latest are not often finalised until the following January 31st deadline. It’s getting a bit confusing right?
Important things to consider being self employed when trying to get the best mortgage deal
Work with your mortgage broker as though they are part of your business team. Have an open dialogue between:
- your accountant
- and your mortgage broker
This sounds obvious, but the mortgage world has changed a lot in the last few years and it is more important than ever to plan ahead for what you want to do and what you want to achieve. After all once your accounts are finalised for a particular year, there’s not a lot you can do, to make your income stack up, until the following year. Click To Tweet
Your accountant’s job is usually to prepare your accounts, offset expenses and minimise your tax liability. So can you see a potential issue straight away in finding the best mortgage deals? If your taxable income has been cut (which is great for minimising tax), this might cause you problems when wanting to borrow money and may affect you getting the best mortgage deals!
There is sometimes no particular logic why one lender will consider one thing and another lender something completely different. The important point is to make sure whichever lender you use, that they are going to accept your income, as you see it. Otherwise you could have a nasty surprise with a lender turning around and declining your mortgage, even after you may have paid a £400 non-refundable application fee! The key is to get it right first time. Otherwise it could be a timely and costly mistake – another great reason to get professional independent advice from a mortgage broker.So to bring this to some kind of conclusion, the best mortgage deal is whatever the right deal is for you. Fundamentally, if you are buying a house or even refinancing (remortgaging) the most important thing is that the mortgage is affordable. You can only ever make the best decision on the mortgage at a particular moment in time. Hindsight is a wonderful thing. But with a good broker hopefully you can have the confidence in them to achieve your goals, with the confidence that your deal is “the best mortgage deal”.