Self Employed
By Mark Carney. February 5, 2024.
Getting a mortgage when you’re self employed or a limited company director.
The way lenders assess customers who are self-employed varies both between lenders and also between the customers circumstances. This is why it is always best to use a mortgage broker. A broker will know how each lender assesses new applicants and which lender will be best for you. Here I will explain and shed some more clarity on the subject.
Do I need 2 years accounts / Can I get a mortgage with only 1 years accounts?
Ideally you would have been trading for at least 2 years with corresponding accounts submitted to HMRC. There are lenders willing to consider applications with only 1 year of trading, however as there are only a handful of lenders willing to consider customers with 1 year of trading this can limit the mortgage deals available. The lenders are there if needed, but ideally if you have 2 years accounts you will have so many more lenders to choose from. More lenders means potentially better deals for you.
Sole Traders and partnerships:
What you will need as proof of income
Those who are sole traders or partnerships will need your latest 1 or 2 years tax calculations (SA302’s) and corresponding tax year overviews. If you have an accountant, they can supply these for you. If you don’t have an accountant, you can log into your .gov portal and download them yourself.
We will also require the latest 3 months business bank account statements. This is to show that the business income over the last few months matches the previous years income. If this has reduced, the lender will require an explanation.
How self-employed income and affordability is assessed
The figure lenders use for affordability purposes is the net figure. This is the figure you use to calculate how much tax is due.
E.g. Your business brought in £50,000; but after costs and deductions of £32,000 (equipment & vehicle expenses etc.) you pay tax on £18,000. This £18,000 is the figure taken into account for lenders affordability.
Limited Company Directors:
Limited company directors are assessed differently. Lenders are aware that you pay yourself a salary and take dividends and are happy with this.
What you will need as proof of income
What lenders will use as proof of income can vary slightly from lender to lender. The majority will want your latest 1 or 2 years tax calculations (SA302’s) and corresponding tax year overviews, as well as the last 2yrs submitted business accounts. These can all be provided by your accountant.
How income and affordability is assessed – this is the benefit of using a mortgage broker
As a limited company director these are the 2 main ways a lender will assess your income for mortgage affordability assessment. The lender will use your salary & either dividends taken or your percentage share of the company net profits.
See the scenarios below for an explanation.
Scenario 1 – Salary and Dividends
Some lenders will use both your salary and dividends together when assessing income. E.g. Salary £10,000 + £30,000 dividends = £40,000. In this instance the lender would use the full £40,000 when assessing your affordability.
Scenario 2 – Salary and Net Profit
What if you didn’t take all the company profits as dividends and wanted to leave some of the profits in the company accounts.
Example:
You own your limited company 100% and the company made a gross profit of £60,000. After deducting your salary of £10,000 plus other business expenses totalling £10,000 this leaves £40,000 net profit before you take your dividends.
Some lenders will take the net profit into account instead of the dividends taken. Effectively meaning when lenders assess your affordability instead of using a total of £40,000 (scenario 1) they could potentially lend you a higher amount as they will use your salary (£10,000) + your company net profit (£40,000) = £50,000.
This is just a little snapshot of how self employed income is used when being assessed for mortgage affordability. It is always best to speak to a broker who will be able to go through your specific income and situation and tailor the advice to suit your needs.
I hope you found it useful. If you have any questions, feel free to get in touch.