As mortgage restrictions become tighter there are a lot of areas to consider especially if you are a business owner

What evidence of income do lenders look at?

Your broker will ask to see:

  • Three months business and personal bank statements
  • Two or three year’s sets of accounts to prove your income.

You must make sure you are paying yourself regularly from your business

Brokers, lenders and underwriters are also required to check your income with HM Revenue & Customs should they suspect it to be over declared. This can result in an application being rejected and a tax enquiry. It is very important that your information is presented correctly by your broker.

The traditional way of working out how much you can borrow is via income multiples (e.g 4 times gross income). This benefits employees rather than business owners as tax efficiency is not considered, however most lenders have converted to affordability rather than income multiples. Affordability is based on your net income less your outgoings such as utility bills, insurance, food, car running, other loans and council tax. The amount of disposal income left will then be considered to see if you can afford the repayments.

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

The two most common are tracker mortgages, (where the interest and repayments go up and down every time the Bank of England change their rates), and fixed rate mortgages, (where for a period of time your interest rate and repayments are fixed). Other types include an offset mortgage, (where you can make flexible over and under payments, and draw more money out when needed), or interest only mortgages, (but you need to put aside enough to cover the capital as you will be required to pay this when you reach the end of the term of the mortgage). The flexible mortgage offers you the option of overpaying your mortgage when finances allow. Equity Release, Home Reversion Plans and Lifetime mortgages. Re-mortgaging can be an effective way to rationalise any debts, reduce overall interest costs and release equity for other purposes. Read more on the options available to you.

Finding the right mortgage package to suit your needs is not impossible, but you should take care and use an Independent Financial Adviser as our case studies show.

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 time out of his business to develop his own home and this has resulted in a loss of 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 more recent year for his application. If Harry had planned ahead he could have renewed his mortgage a year ago and borrowed more.

New and growing Limited Company

Trevor is in his third year of trade so only has two years of accounts approved by his accountant. In the first year he made £40,000 after corporation tax and he drew it all out, 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 limits the amount of lenders significantly and if he needs a mortgage which relies on 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 chances of getting a competitive mortgage. At the point of renewing his mortgage he also needs to make sure that he has taken regular income for the last three months as the lenders will look at this.

All the technical information and content in the above article was correct at the time of posting on our website but A4G LLP cannot guarantee that it is still currently correct. 

You should always discuss your financial affairs with an Independent Financial Adviser. A4G work with a number of advisers and are happy to recommend one appropriate to your circumstances.

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