Self-Employed Mortgage With 2 Year's Accounts

How much can I borrow on a self-employed mortgage?

The maximum borrowing multiple for a self-employed applicant with two years accounts is the same as for an employed one, typically 4.5 times earnings.

The same multiple usually applies, regardless of whether you are making a single or joint application.

Some providers will lend at 5 - 6 x earnings for high earners or people in certain well-paid and stable profession occupations. Doctors, barristers, architects and accountants for example, can often borrow more.

Each lender definition of a high earner is different, but typically starts from £70,000 single income or £100000 joint.

Can I get a mortgage with declining profits?

Yes, it's still possible to get a mortgage if profits have declined in the latest year. But it depends by how much.

A few lenders won't consider it at all, others will only do so if profits have declined less than twenty percent year-on-year, or even ten percent. Specialist lenders can sometimes be more flexible, depending on circumstances.

The reason for the reduction in profits is key

Falling profits understandably raise concerns for banks and building societies around the sustainability of the business.

Now, of course, there are many causes for a dip in profitability. It could be the loss of a large customer or changing market conditions.

But it could just as easily be due to investing in new business infrastructure or hiring new employees. The point is, context is key, and some lenders are willing to take a view based on the specific circumstances.

How self-employed income is assessed

For company directors, mortgage affordability is assessed in a few different ways.

1. Salary and dividends (many lenders)
2. Salary and share of net profit after corporation tax (some lenders)
3. Salary and share of net profit before corporation tax (a few lenders)

For sole traders, lenders will use your pre-tax 'profit from self-employment' figure on your sa302/tax calculation.

Regardless of whether you are a sole trader or ltd company director, some lenders will use the latest year's share of net profit figure, rather than an average of the last two. Helping to boost affordability.

If your income has fallen in your latest year's trading, most lenders will use the most recent year's accounts rather than an average of the last two.  

Other lenders use slightly more complicated formulas, dependent on your level of earnings over both years of trading.

Here are a couple of examples:

Rose and Ben are married, directors, and equal 50% shareholders in their graphic design limited company.  They're in their third year of trading and have submitted two years accounts to HMRC.

In their first year of trading, they each took £12,500 in salary and £37,500 in dividends.  However, they took the same salary but only £30,000 dividends, in year two.

In this scenario, most mortgage providers will assess their joint income using only the latest lower year's joint income of £85,000 (2 x £42,500). Giving them a maximum borrowing potential of £382,500 (4.5 x £85000), subject to deposit size, credit commitments and other eligibility criteria.

If the figures were reversed, so that the most recent year's figures were better, then an average of both years' earnings would be used. In this case, £92,500. The maximum borrowing amount would therefore rise to £416,250 (4.5 x £92,500).

There are a couple of caveats worth noting. If the latest year's figures show a large increase from the previous year, mortgage underwriters may seek more information as to the reason why.

This is because they will want to satisfy themselves the increased profitability is a result of underlying growth and sustainable going forward. Not simply a result of one-off factors.

Some high street lenders will only use the latest year's income for affordability if the increase is within a certain range. For example, 20% of the previous year's earnings.

Similarly, if your second year shows a sharp decrease in profits, the lender will want to understand the cause and reassure themselves the business has a viable future. Many lenders will use just the latest year's earnings in this scenario.

How do I prove my income to a lender?

The mortgage documentation required depends on whether you trade as a limited company, sole trader, LLP or contractor.

It's likely you'll be required to provide some or all of the following documentation for each year's trading:

• SA302 tax calculation (aka tax computation).  If you have an accountant who submits your self-assessment tax returns using online accounting software, she should provide you with the SA302s. Otherwise, you can download them from your HMRC online portal.
• The accompanying Tax Year Overview (TYO) docs.  You can download these from the HMRC online portal.
• Your two years certified accounts and possibly an accountant's certificate.  The latter is a simple form your accountant fills out for the lender, and which verifies your turnover, gross and net profit before tax, salary and dividend (for directors) figures.
• Business bank statements for the latest 3 to 6 months trading.
• It's also possible your mortgage provider will request a letter from your accountant, detailing your projected profit and loss account for the current financial year.

I have bad credit showing on my credit report. Can you help?

Yes. There's no doubt, that it's trickier to get a mortgage with bad credit when you're self-employed. But it all depends on the recency and severity of the adverse credit.

For example, many banks and building societies will only consider applicants if they have no more than one, relatively low-value, county court judgement (CCJ) or default in the past 2 years.

However, we've also access to non-mainstream lenders willing to look at mortgage applications from borrowers with poor credit. Including those with a severe adverse credit history.  

People who've been discharged from bankruptcy or settled an IVA, for example, though most providers will only consider an application 3 or 4 years after completion of the insolvency.

As you'd expect, the more years that have passed since the adverse credit event(s), the greater your chances of securing a mortgage deal.

Getting mortgage advice and a quote

As a specialist self-employed mortgage broker, SEMH have a deep understanding and knowledge of lending criteria and provide expert advice to company directors, partners, contractors and sole traders alike.

Gettig a self-employed mortgage approved doesn't have to be difficult or time consuming and with two years accounts and a good credit history, we can quickly match you to the most appropriate mortgage lender and deal for your circumstances.

So if you're looking to save yourself time, hassle, and quite possibly money, get in touch by calling 0117 205 0655 during our office hours of 9 am-5 pm Monday to Friday. Or get started quickly here.