Many people believe that Lenders prioritise permanent employees, and it is quite hard to get a mortgage or go for a good deal when an applicant is self-employed. Lenders consider Company Directors to be self-employed and, generally, Lenders consider self-employed applicants to be high risk. The assessment of income for Directors may differ from Lender to Lender. Therefore, Company Directors should seek the assistance of an expert in the market before applying for a mortgage.
In this article, we give you some tips on how to secure a mortgage if you are self-employed and explain how our Mortgage Advisors can help you go for the most suitable Lender and the best deal for you.
Each Lender has its own criteria and assessment process. A client with a clean credit history and a trading history of two years can generally proceed with a 5% deposit if they meet the affordability criteria. However, the interest rates will be relatively high.
A borrower with a bad credit history or with a trading history of less than two years may need a deposit of 15%–20%. Having a larger deposit would benefit the borrower by securing a better rate of interest.
For Company Directors, Lenders consider the salary taken from the business along with the dividend. Problems occur if the Company Director has drawn only the base salary up to the tax-free threshold. While this approach keeps a lot of profit in the business and is also tax-efficient, the drawback is that Lenders will only accept the income depicted in the tax calculation/tax return, which is withdrawn from the business.
Generally, a Lender requires to see proof of income to make sure that the client can make the monthly mortgage payments. A Company Director can use several methods to prove income. The primary documents to prove income are:
For residential mortgages, Lenders always assess affordability based on income. In addition to income, the client’s expenses will be evaluated. The general rule is that a person can borrow up to four times their annual income, if they have a clean credit score.
The industry norm is to provide two years’ worth of limited company accounts, but some will consider one years’ worth. Some Lenders won’t accept accounts older than eighteen months, whereas others will not consider accounts older than fifteen months. It is always good practice to get your accountant to provide the latest financial statements.
Generally, Lenders will ask for the tax calculation (SA302), tax return (SA100), and tax overview. The tax calculation shows income for the year, personal allowance, and the resultant tax bill due for that year. The SA302 includes the amount of income that will be considered in the mortgage application. Most Lenders will consider salary and dividend income.
Company Directors can request SA302s from their accountant. If you are submitting your tax return using the HMRC self-assessment online portal, you can sign into your account and print off up to four years’ worth of SA302s and corresponding tax year overviews. The documents you provide should not be older than eighteen months.
A Company Director with a declared loss within the last three years may find it challenging to secure a mortgage. High Street Lenders will most likely decline the application if there is any reported loss within the previous three years. Lenders will doubt the ability of the borrower to repay the mortgage if the business appears to be struggling.
However, there are specialist Lenders who may consider an application with declared losses. This happens when there is a declared loss in the last three years but the business has previously shown profits. If the loss is due to the salary that was withdrawn, specialist Lenders may overlook the issue and consider the applicant to be still earning an income.
At WIS, we consider your individual priorities and circumstances and discuss any complications with the Business Development Managers of Lenders when and where it is required. As we are operating in the whole of the market, WIS is always capable of providing you with the most suitable deal.
So, why not contact us to take you to the right option for you?
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.