It is true that lenders prefer prospective borrowers to provide a solid and predictable story of their recent finances, such as a regular salary from employment, which can be evidenced with payslips. This can often mean employees who earn well and have a deposit may breeze through the mortgage application process.

For business owners it is not so simple, due to the varying nature of their income and the different supporting evidence they can provide. However, with careful planning and consideration, it is possible to make the process much less painful for business owners too.

Where to start?

The first step is to speak to your Client Manager or Principal Adviser before you contact your mortgage broker or lender, and with as much notice as possible before you need to complete a new mortgage or re-mortgage.

We strongly recommend this because in most circumstances your latest accounts and/or tax returns need to be provided to the lender to secure a mortgage. As soon as we become aware of your requirements, we can then get cracking with preparing the documents in the background while you continue with the next step.

We would suggest the next step is talking to a reputable mortgage broker.

Even if you have a good relationship with an existing mortgage company or bank, they can only tell you about the products they offer. Whilst they may offer a decent deal, a mortgage broker can look at the whole of the market and may find you an even better deal.

Additionally, they can support you through the process and correspond with the lender directly on your behalf. This usually won’t cost you anything extra (although always check), as the mortgage broker receives their fee via a commission from the lender.

What evidence do lenders look at?

You can expect to have to provide some or all of the following:

  • 2 or 3 years of accounts, including your last completed financial year, to show your business’s pre-tax profits
  • 2 or 3 years of tax calculations (often called SA302), including the last completed tax year, to show your taxable income declared
  • 2 or 3 years of tax year overviews, to show your tax position
  • Last three months payslips from all employments, including director’s salary
  • Last three months business bank statements
  • Last three months personal bank statements

Quick tip – You can download the SA302 tax calculations and tax year overviews by logging into your personal HMRC online account.

Unfortunately, lenders are no longer able to simply accept a reference from your accountant; it has to be accompanied by supporting documentation.

Mortgage brokers, lenders and underwriters are also required to check your income with HMRC, if they suspect it is over-declared. This can result in an application being rejected and HMRC opening a tax enquiry.

It is vital that you draw your money from your business correctly at all times and that this is documented. This includes drawing a salary that matches your payslip and documenting dividends paid with dividend vouchers. Please see our article How do I take money out of my Limited Company?

Once again, planning in advance is key!

The traditional way of working out how much you can borrow is via income multiples, e.g. multiply your income by 4 to arrive at a mortgage offer. This benefits employees rather than business owners as tax efficiency is not considered. However, most lenders have converted to affordability rather than just income multiples. Some will even consider a business’s profit each year if you are majority owner.

This means in effect, instead of just looking at your income, most good lenders now consider your overall financial health and take a closer look at your outgoings.

Affordability is based on your net income less your outgoings, such as utility bills, insurance, food, running your car, council tax, loans etc. The amount of disposable income left will then be considered to see if you can afford the repayments.

If they determine you won’t be able to comfortably afford mortgage payments, they won’t offer you as large of a loan, or possibly may not lend to you at all.

This may be possible with some specialist lenders and could potentially boost your borrowing amount.

For example, if your company annual profits are around £150,000 but you’ve been taking a £30,000 salary, with a normal lender you could typically borrow £120,000 to £150,000.

But if a specialist lender will consider your company profits, you may be able to borrow £600,000. It’s worth seeking financial advice before going down this route as it can increase your fees for arranging or your monthly interest charge.

Your credit score is one of the most important things to consider when applying for a mortgage and unfortunately, it’s not unusual for company owners to have a bad credit history when juggling lots of different finance to support their business.

Even the most successful entrepreneurs will have taken financial risks to get their business where it is now. This could have led to county court judgements and even bankruptcies on their credit history. If this is the case for you, the bad news is there is no quick and easy route to get a mortgage. You’ll have to take time to rebuild your credit score.

The good news is, even after just one year of responsible borrowing, no missed payments and a steady address history should get your credit report in a better state.

Higher interest rates mean higher repayments, and lenders generally charge their own interest rate linked to the value of deposit you put down.

It is worth asking your broker to see what could happen to the repayments with different levels of deposits. Reducing the repayments increases the chances of being accepted for the mortgage because it will be more affordable for you to repay.

You should also consider the lenders set up charges as well.

What types of mortgages are there?

There are three main types of mortgages with different benefits and drawbacks:

  • Tracker mortgages – where the interest and repayments go up and down every time the Bank of England change their rates
  • Fixed rate mortgages – where for a period of time your interest rate and repayments are fixed
  • Variable rate mortgages – where the rate is determined by your lenders ‘standard variable rate’. This is traditionally the cheapest initial rate, but can it go up as and when your lender decides.

Case Study 1: Self employed builder with varying income

Harry has been a self-employed builder for 20 years consistently earning £20,000 a year. This year he took some money out of his business to develop his own home and this has resulted in a loss income of £10,000.

His wife earns a salary from another company, but their mortgage application is dependent on both incomes. Despite having a good trading history and a valid reason for a dip in income, the lenders are likely to only look at the most recent year for his application.

If Harry planned ahead, he could have renewed his mortgage a year ago and borrowed more. 

Case Study 2: New and growing Limited Company

Trevor is in his third year of trade so only has two years of accounts by his accountant. In the first year he made £40,000 after corporation tax and he drew it all out. In the second year he made £150,000 after corporation tax and drew £40,000, leaving money in the business to fund growth.

Having two years trading history limited the amount lenders would lend significantly. If he needs a mortgage which relies on an income of over £40,000 then there are only a few lenders who would consider the undrawn profits of the company.

Less lenders also means the interest rates tend to be higher.

If Trevor drew more than £40,000 in year 2 then although his tax bill will have increased, he would also have increased his changes of getting a competitive mortgage.

How can we help? 

As explained above, please contact us in advance so that we can start work on helping you gather the supporting information you will need.

In addition, your Principal Adviser will be happy to discuss all of the above in more detail with you. If you do not have a mortgage broker, they will also be able to provide you with contact details of different brokers who you may choose to contact.

Want to find out more?

Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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