Most lenders have always deemed the self employed as a risky bet compared to the permanently employed, but is this fair? Of course this is true in many cases where individuals have little experience or ability to run their own businesses, but there are plenty that have made a success of their own business and, taken in isolation, may in fact be a much better bet than say an employed individual only 3 months into a new job. An employee has little or no control over the direction of their employer whereas the self employed will typically have full control of their own destiny.
Regardless, the majority of mortgage lenders will favour employed applicants when it comes to their decision making systems, so it is important to take advice as to best options available. As well as sole traders and those in partnerships, lenders classify Limited Company shareholding directors (typically with a 20%+ shareholding) as self employed, even though those individuals may technically be ’employed’ by their own company.
Most lenders will want at least 2 to 3 years full accounts, however, there are lenders that may consider applicants with just 1 years full accounts. Some lenders will average the figures over 2 or 3 years to arrive at a figure that they will use to calculate the maximum loan, others may take just the last full year’s figure as long as the general direction is upward. Some lenders will not accept reducing profits as they fear that this decline may continue. This can seem harsh in some cases where there is a perfectly valid reason for such a fall, for example a company spending more on machinery in one year, which might reduce the profit for that year, but in the long term such an investment could significantly increase profits.
Please note that for Sole Traders and Partnerships lenders will use the ‘net profit’ figure to calculate the maximum loan. Those with good accountants who have reduced their tax bills by reducing the profits may rue that when applying for a mortgage as the lower their profit, the lower the mortgage available. For Limited Company directors, lenders will take the annual salary plus dividend payments for the year.
Also, be aware of what a lender may ask for to evidence your self employed income. Some will ask for full accounts or a reference from an accountant, however, many will insist that the accountant has a specific qualification, such as Certified or Chartered status. Many lenders will not accept a reference from a bookkeeper, although some will.
Importantly, it is becoming more common that lenders will ask for SA302s, which is an official HMRC document that confirms your annual tax return. Only this month, Halifax announced that they are to stop accepting an accountant’s reference and now require SA302s. To save what could be precious time, it may be wise to obtain an SA302 for each of the last 3 years now as this may well be required at some stage, even if not initially, by the lender. You could do this via your accountant or you can directly contact the Self Assessment helpline at HMRC on 0300 200 3310. Remember to have your National Insurance number handy so they can verify your identity.
Everybody’s situation is different so if you have any questions, please get in touch. We’ll be happy to help.
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