Self-employed and looking for a mortgage

Another tax year has just passed us by and for the self employed, attention will turn over the coming months to submitting your tax return for 2017/2018.

Conversations will take place with accountants with a view to mitigating the tax liability as far as possible, but by being overzealous you may find if you’re looking to buy for the first time, move house or just remortgage that the level of borrowing you require is not available.

If you’re a sole trader lenders base your affordability on your net profit and for company directors generally with a shareholding of 20% or more, a lender will typically view your salary and dividend income.

While you may feel you can afford to pay the mortgage, if the evidence available to the lender doesn’t support this, then they simply won’t lend.

Nowadays lenders will generally request the past two years tax calculations and tax year overviews, the former being, in effect, a summary of your tax return and the latter confirmation of the tax paid.

Some lenders may still insist on an accountant’s reference which asks for information about the business to include trading figures.

How lenders treat the income varies: if it is increasing most lenders will take an average of the figures but occasionally a lender may take the latest year’s earnings.

This is very much on a case by case basis but if your income is decreasing the latest year’s figures will be used.

What is worth being aware of is for company directors some lenders will look at the share of net profit plus salary as opposed to salary and dividend income, this effectively means they are looking at the base profitability of the business rather than just what the directors have taken out of the business.

If you have recently set up as self employed and haven’t been trading for over two years and don’t have a couple of years figures, all is not lost as there are lenders that will consider a mortgage after just one year of trading subject to credit score.