No matter what your employment status, there’s no denying that getting a mortgage for some has been tougher since the credit crunch, and since the wholesale withdrawal of self-certification mortgages, the self-employed have had extra hoops to jump through.
When people think about how to get the best mortgage deal, they tend to consider three elements: their financial circumstances (income, savings and credit rating); getting advice from the right mortgage broker; and getting a deal from the right lender. However, there’s a fourth element that can make a huge difference for self-employed people looking to boost their chances of getting the best mortgage deal: enlisting the help of an accountant.
As a freelancer or self employed mortgage applicant, the chances are for many lenders you’re going to be asked to provide accounts prepared by a certified or chartered accountant, to prove your income and enable the lender to make a decision. How those accounts are presented can have a major impact on how much you might be able to borrow.
Your business set-up
Lenders may consider slightly different factors depending upon exactly how your business is set up.
If you’re a sole trader, all profit is treated as income; HMRC can provide a form SA302 showing income received and tax due for any given tax year. If you’re in partnership, the lender will want to see each partner’s share of the profits, so you need to make sure your accounts will allow the lender to easily see your own personal annual income. If you operate your business as a limited company, then your business and personal affairs are kept separate; you probably pay yourself a basic salary plus dividends, and you need to make sure both are taken into consideration by lenders.
Your accountant will be able to offer advice as to whether your current business set-up is best for you, particularly with regard to tax efficiency. For example, if you currently operate as a sole trader, you might benefit from establishing a limited company, especially with forthcoming reductions in corporation tax rates. If you do decide to make the change, they will also be able to help you set up the new company.
How much can you borrow?
The amount a lender is willing to offer is generally based on a borrower’s credit score and verifiable income. As a self-employed person your income may fluctuate, and might also come from a variety of sources.
If you’ve had a good year and the business is growing, you might find a lender takes an average of the previous two or three years’ income, which will be lower than the current figure and so will effectively reduce your borrowing capability. If your most recent figures show a worse year than the previous two or three, the lender may only take the current year’s figures into account – which can have the same effect on the amount you can borrow. In essence, the problem you face is establishing a figure against which your borrowings can be calculated, and that’s where your accountant comes in.
Positioning your business
Most accountants help clients position things so that the business – and/or the individual – minimises their tax outgoings. However, by keeping more cash in the business (rather than drawing it as salary and dividends) you could end up making yourself look less well off than might actually be the case, which could mean that even though you know you can afford to repay the loan you are seeking, your personal income figures do not support your assertion.
You must be sure to explain to your accountant that you’re looking for a mortgage deal, and tell them how much you hope to borrow. Together with your mortgage broker they will be able to advise as to whether it would be to your advantage to take more profit out as a dividend so your personal income is boosted; you might have to pay more income tax in the short term in order to get a better mortgage deal. Be aware that some lenders do take retained profits into account when looking at affordability – your mortgage broker is likely to be able to advise you on this – and your accountant will be able to structure things accordingly.
Keep your business and personal spending separate. If you are in the habit of putting business expenses on your personal credit card and paying the bill via the business account once a month, you might want to reconsider. To a lender looking at your bank statements, that will look like personal spending and may have a detrimental effect on your borrowing ability. Again, an accountant will be able to help you see where potential pitfalls lie and, if you don’t have separate bank accounts for business and personal spending, can help get them set up. Remember that a check will be run on your business address, too, so make sure all your payments are up to date.
It can seem like a chore to have to show two or three years’ worth of accounts, but if you have them – and especially if they show an upward trend – then the more the better. While there are various things to take into account when you are looking for a mortgage, getting your finances in order first – with the help of an accountant and a mortgage broker– can make a huge difference to your borrowing capacity.