Self-Employed Net Profit Mortgage

Can I get different income multiples based on net profits when applying for a mortgage? Do lenders apply a lower income multiple for self-employed applicants?

On the whole, lenders don’t discriminate – but some are more generous than others for the self-employed. You don’t get a lower income multiple or a different rate if you’re self-employed on the whole.

There are always exceptions – with anything I say on these podcasts there’s always an exception to the rule. But on the whole you’re not penalised for being self-employed.

Can you use projected income to get a mortgage?

Not so much. We might use projected income to evidence that business is still going in the right direction. Perhaps two years ago you had a poor year but the most recent year was much better.

If we’re trying to use that most recent year, lenders might ask what the next year will look like. If that year’s nearly finished, a management accountant can help us evidence that the bad year was a blip and it’s fine again now. That’s not really very common, though.

Is there a maximum loan to income ratio when using net profit?

Yes, there always will be. It doesn’t matter whether you’re self-employed or not, or what income we’re using. All the lenders have a maximum cap and they’re all similar, yet different.

You will get one figure with a lender, but based on the same income a different lender will give you another figure. Some lenders are just more generous than others.

Are there any minimum income thresholds for self-employed applicants?

No, not that I can think of. I see people sometimes, particularly if they are employed and have a little self-employed business on the side, who might make a couple of grand a year.
We can use that. It’s not a problem.

There’s no minimum income, but if you don’t earn much, you’re not going to be able to borrow much. If that £2,000 a year is your only income, you won’t be able to borrow anything, really.

Obviously if it’s a joint application, the other person may earn a lot more. On a joint mortgage, if one person doesn’t put in any income at all, they are a dependent. That reduces the overall amount you can borrow – because you’re dependent on your partner’s income.

If you’ve got some income, even a tiny bit, you suddenly go from reducing the amount you can borrow to actually contributing to affordability. The difference can be quite dramatic, even with a small income, because you’re no longer dependent.

Are there different requirements for sole traders versus limited company directors?

It’s a whole different concept. It’s very difficult to tailor this to suit both. If you’re a sole trader, it’s fairly straightforward. You’ve got your tax return which then gives you a tax calculation, stating your profit from self-employment.

We want two years of those, as we’ve discussed. We’ll average those out, and that’s the amount the lender will use to work out affordability. That’s pretty straightforward.

When you’re a limited company director, using net profit is often a good thing – because you’ve probably got more profit than dividends. That will give you a higher loan amount.
For that, we want limited company accounts, your SA302 and your tax calculations which state your salary.

You’ll get pay from your business, probably £12,000 or so – whatever the tax-free threshold is that year. The rest will be dividends, but we won’t use those from your tax calculation. We’re going to use the profit from your accounts.

When I see a limited company director, I end up asking for many different documents to work out which lenders will be best to go to, and which income we’re going to use. It can vary case by case.

If we don’t need to push affordability, you’ve probably got more choice with dividends. But if we’re pushing affordability, you might have a better option using your net profit.

If I operate multiple businesses, how do you assess total income?

We just add it together. It doesn’t need to be complicated. Some customers have a group structure – a holding company that owns other limited companies. Sometimes people own a couple of different limited companies.

We just add it together. You’ll still get salary and dividends, which will be on your tax calculation. Or, you’ll probably pay yourself a salary from one business and we can use the net profit of all the businesses to add into the total.

There are lenders we can go to for everything. The more complicated it gets, the more specialist it is – but generally speaking, lenders have seen everything. Multiple businesses just means multiple profits.

Let’s say you’ve got two businesses – if one is very profitable and we only want to use that one, you can do that. If it’s a group structure, lenders will look at the businesses within the group. They’ll end up with a net figure across them all.

We could get really complicated, but in those situations you’re not going to find the answers to your questions in a podcast. You need to get some proper advice, so get in touch.

What else do we need to know about a self-employed net profit mortgage?

It can seem quite complicated, but it doesn’t have to be. Essentially, if you’re a company director, there are many choices and all the mortgage providers are different. There are lots of lenders, lots of choice and different ways of looking at things. It’s best to seek some professional help.

Think carefully before securing other debts against your property. Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

The information contained within this article was correct at the time of publication but is subject to change.