We are delighted to have a guest blog post from Malcolm Wallace, director of Parsonage Financial
Here is Malcolm’s advice if you are thinking or moving or re-mortgaging your current property.
The rules around mortgage lending have changed over recent years for everyone, but it can be especially confusing if you are a business owner or self-employed.
Having advised hundreds of clients on mortgages over the last fourteen years, there is definitely a common belief amongst the public that it is ‘more difficult’ to get a mortgage if you have your own business. It isn’t. You just need to evidence your income in a slightly different way than if you were an employee.
So, what do mortgage lenders ask for when assessing an application from a business owner?
For sole traders and partners it is relatively straightforward. They are interested in your pre-tax net profit (or your share of it if you are a partner). Most lenders take an average of the last two years’ figures. Some use an average of the last three.
One important thing to point out is that if the most recent year’s net profit figure is lower than the previous year they will use the lower figure rather than an average of the last two or three years. They will probably also want an explanation for the reason for the drop in profits. The reason for this is that they will want some reassurance that the profits will not continue to fall in the future as this would obviously affect the applicant’s ability to repay the mortgage.
The rules for company directors are slightly different and vary from lender to lender. One thing that is the same is that most lenders still need at least two years’ proof of income (there are one or two exceptions to this which I will go into below).
Some lenders will use basic salary and dividends to calculate how much can be borrowed. Some will use basic salary plus share of the net profit. Some just use share of the net profit.
Confused? This is why it is a good idea to take independent advice. Knowing lending criteria is probably more important than knowing which lender has the lowest rates. Anyone can see the lowest rates on the Internet nowadays, but the comparison sites do not show how lenders assess income.
An example of this is that there are currently two or three lenders who MAY accept an application with just one year’s accounts. Another lender works on just the most recent year’s income rather than an average of the last two or three. This can be helpful if income has increased significantly in the most recent year.
Finally, I have a couple of helpful general points. A higher income means an increased level of potential borrowing. Lower income means lower borrowing potential. This is one thing to consider when submitting your accounts and tax return. Nobody I know enjoys paying tax but this may be a necessary evil if you are planning on applying for a mortgage and need to show that a decent level of earnings has been achieved.
Secondly, if you are thinking of moving home or re-mortgaging, let your accountant know as soon as possible. It is important that they know in advance of preparing your accounts.
Being organised is key. The sooner you can seek advice before moving home or re-mortgaging, the better.
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