Running your own business, whether self-employed, as a partnership or through a limited company seems to cause problems when it comes to obtaining a mortgage. This is particularly relevant to anyone who hasn’t been in business for a long time and been able to establish a track record. Although, we have come across issues even for longer established businesses.
Our experience is that many (possibly most) mortgage lenders do not understand accounts and tax returns as they apply to anyone running a small business. Unfortunately, the same applies to a lot of mortgage advisers where we have seen conflicting information provided. One of our clients was trying to obtain a mortgage and two advisers gave him their best options, which wasn’t enough to enable him to proceed with the purchase. Realising that it was a matter of correctly interpreting the accounts, we suggested he spoke to someone we knew. The result was a mortgage offer over 50% higher than the two previous ones – a happy client.
We don’t arrange or advise on mortgages but are often asked about them. To help with this article, we asked a couple of mortgage advisers. We would be happy to refer anyone who is looking for a mortgage to an FCA regulated adviser. A good mortgage adviser will find lenders whose criteria work to the advantage of the borrower.
One of the issues is that income from running a business can rarely be described as “regular”. Mortgage lenders like to see regular income which they can project into the future. Regulation was introduced some time ago to “protect” borrowers. Nowadays lenders have to take steps to be certain that a borrower can afford the repayments. This effectively stopped “self-certification” mortgages and lenders have to know what a borrower’s income actually is.
There are variations in how lenders approach this.
Some lenders definitely want to see three years’ accounts. Others will accept two years. There are some which will accept one years’ accounts, although these are rare.
Lenders will normally average the profit over a period of years and may refuse or, at the very least, need extra assurances if the profit is declining. Some, while asking for two or three years’ accounts, will only consider the last full years’ trading.
Those, few, lenders which will consider one year’s accounts will usually ask for a projection and look at bank statements to confirm continuing income. They may also look at an applicant’s previous credit history, including previous employment to help them arrive at a decision.
Income is difficult to establish in many cases because there can be variations due to tax allowances etc. For example, a sole trader or partnership may show a reduced (or no) profit because Annual Investment Allowance (AIA) has been claimed in the year. When providing a mortgage reference, we try to explain the reason for any substantial variation.
A director/shareholder of a Ltd company is usually assessed on a combination of salary and dividends. A lot of lenders will ignore profit retained in the company. We don’t understand why because this is often done to reduce personal tax and the money is available to be taken at a later date. There are a few lenders which will take the retained profit into account.
Providing a mortgage reference is automatically included in our standard pricing, unlike some of our competitors who will charge extra for these – and, at the time, you are not in a position to dispute this because you need the reference.
Very few lenders will consider applications where the reason for the mortgage is, or includes, capital raising for business purposes or for paying tax bills. The few which do will almost certainly charge a higher rate.
Our experience is that many mortgage advisers struggle when trying to arrange mortgages for applicants running their own business. If you want the best deal, make sure your adviser understands business accounts.
Note that we are not mortgage advisers and are definitely not regulated by the FCA to provide mortgage advice. This article is for information only. As mentioned above, we can put you in touch with FCA regulated mortgage advisers who may be able to help. You should always remember, “Your home may be repossessed if you do not keep up repayments on your mortgage”.