Mortgages for self employed
Mortgages for self employed - article 1 of 3
Throughout December 2017 we will be attempting to squash the myth that arranging a mortgage for someone who is self-employed is difficult. The fact is anyone who is self-employed can get any mortgage that is available to an employed person, providing they can produce proof of income, that will satisfy that particular lender.
In this article we are going to cover a type of self-employment that is technically not self-employment! No it’s not a riddle it is a director of a limited company that owns more than a 25% share-holding in that company.
There are a number of ways a director of a LTD company can show profits, for income purposes and this is not usually the net operating profit of the company.
First we have the normal salary, this means the director is paid a salary by the company and this comes from the gross operating profit of that company, it therefore does not show in the net profit, so it has already been deducted. Sometimes this salary can be high but invariably it is a low salary below the first tax threshold of £11500 pa.
If a salary is that low, it would normally follow that, that director would get dividends from the company, these come from the company profits. The reason directors of the limited company pay themselves this way is tax efficient but we are not here to have a tax lesson but to understand what proof a bank, or building society would need and also, what they would be looking for to assess this particular persons profit and affordability.
- They would need to see the directors personal tax returns, these are called SA302’s which are sent to the inland revenue each year for them to ascertain the tax that is need to be paid by that director.
- They would need to see the accounts of the limited company that pays the salary and dividends to the director. They would be looking at the net profit in this circumstance and I will tell you why a little later.
- Finally some lenders would want to see the tax overviews, tax what I hear you ask? These are the forms sent to the inland revenue for them to assess the directors income and work out their tax liability which are the forms that produces the SA302’s we mentioned earlier.
Now that all sounds complicated but it is not, it really is just the last 2 years accounts and Sa302’s with the overviews, all should be to hand and not much more difficult to get your hands on than your last 3 months payslips.
Because a directors salary and dividends usually have little, or no tax liability, some lenders input this income slightly differently, some just say you earn your salary and dividends and that is your total gross income, others say this is your net income and that had you been working for a large corporation you would have earnt this extra money, say 20% more to get that net income. That is where we come in, WHO DOES AND WHO DOESN’T? You could go to a lender and they would say ok you earn £40000 salary and dividends so we will lend you 5x £40,000 = £200,000 but you want £250,000. However, some would input this information differently, they would say, you earnt £40,000 net, so our computer says this would equate to £56,000 gross, therefore we can lend you £290,000. It’s a question of who you know and how to present your application.Finally some lenders will also look at the profits of the company and may include some of this to your income, so you may be able to borrow even more!
The one thing you would need to watch, however, is your dividends, if yours, or all dividends to all directors of the company exceed the profits of the company after tax, you may well have a problem! You can’t pay someone from thin air, so you can’t take a salary when the money is not there! They also look at assets of the company v’s debts, if the company shows a negative in this area, it can cause a problem.
Finally, you will find that if the salary, dividends and net operating profit of the company have increased in the last year the lender will usually work on that figure, if, however, they have decreased, they will want a reason why and work on a mean of the 2 years.
I hope this has helped you understand the what sometimes seems complicated way of looking at this form of self-employed income but in reality it isn’t, well not to us, anyway!
If you would like to get in touch with us please call 01452 413300 or email us HERE! We look forward to hearing from you.