Mortgages for self employed
When trying to get a mortgage agreed self employed people have a few more hoops to jump through than the employed. Someone that is self employed is typically a 'sole trader', but it is important to note that a Limited Company Director (with a significant shareholding, typically 20% or more) is also treated as self employed for mortgage underwriting purposes. Limited Company Directors are officially employed in the eyes of HMRC, however their earnings are usually influenced by fluctuations in company performance, in the same way a sole trader's income would be.
How much can I borrow?
You may have heard of 'income multiples'. Since the Mortgage Market Review (MMR) it is not as simple as a lender lending 'x times your income', instead the lender will take into account your circumstances, commitments and sometimes lifestyle to determine what you can afford. Despite this the good old income multiple still serves as a rough guide.
Generally speaking, the more you earn the higher the multiple of your earning the lender can lend, as you are likely to have more disposable income once the basic livings costs are covered. This can range from a big fat £0 for low incomes, up to over 5 times income in some cases.
What income is taken into account?
For a sole trader the lender will usually look at the annual 'net profit'. In simple terms, this is all the money that the business takes in a year (turnover) less all the money spent on running it (expenses).
For Limited Company Directors it is slightly different. Usually a Director will be paid a salary by the Company, and this is part of the Company's expenses, yet it CAN be used towards the mortgage (as it is an expense of the company rather than the individual that is applying for the mortgage). In addition to this, the lender will consider the Director's share of dividends (or net profit depending on the lender).
Lenders will typically take an average over the last two or three years although some may use the latest year's figures which can be advantageous for a growing business, or a disadvantage if had a bad year. The final decision to lend will also depend on how healthy the business is looking, e.g. if the company is showing a decreasing trend the lender may refuse to lend at all.
What proof do I need to provide?
Gone are days of 'self-certifying' income where a lender simply allowed a borrower to declare their income without proof. For sole traders and directors alike, most lenders will want to see at least two full years' accounts from a qualified accountant (or an accountant's certificate) or tax returns (SA302s). Some lenders may consider just one year's accounts although choice will be very limited.
If submitting tax returns it is important to note that lenders will want the completed SA302s rather than the copy of the submission (SA100).
Other factors
A squeaky clean credit record will also boost your chances of getting a mortgage. Hopefully you have avoided the more serious issues like bankruptcies, defaults or county court judgements, but even the odd late or missed payments can cause issues with some lenders. Before you apply it can be a good idea to check your report to make sure there aren't any mistakes. If there are issues don't despair, run it by your mortgage adviser first. Most lenders use Experian for credit searching and you can obtain your statutory £2 report here: www.experian.co.uk/consumer/statutory-report.html
If you have other mortgages that will not be repaid, or if you are a guarantor on other mortgages, this can affect your borrowing. If the properties are let there is a good chance these will not affect your borrowing capacity as they may be deemed 'self funding'.
Other commitments such as loans, credit cards etc can also affect your borrowing even if they only have a few months left.
A longer mortgage term can often increase the amount you can borrow as the repayments would be lower. Most lenders let you borrow to age 70 if you plan to retire at this age, and some even can go older than this. Whilst it is not best advice to stretch your term out (as you will pay more interest) it might help you achieve the mortgage required, and most mortgage deals allow overpayments without penalty (check your illustration) so you can still pay it off over your preferred shorter term if required.
The information in this article is for general interest only, and must not be construed in any way as financial advice.