Self-employed mortgages versus mortgages for those employed by others

Getting a mortgage these days isn’t easy however, it generally runs smoother if you are employed as opposed to being self-employed.

If you work for someone else, a lender will most likely only need to see your last three months’ payslips to verify your income. Depending on bonuses, commission structure, and so on, some may require current and/or previous P60s and if the job or position is new or there has been a very recent pay rise, then a contract or letter from the employer may be requested.

If you are self-employed, things are more complex and some forward planning is advisable if you are planning to move or even refinance.

So, what do most lenders require?

The majority of lenders take an average of your last two or last three years’ accounts/tax returns so speak to your accountant and broker comfortably in advance to ensure you declare the taxable income you need to get the mortgage you want. Some lenders work from the most recent year’s figures only, which can help if your business is relatively new and growing fast.

You can only borrow against the income you pay tax on; there are no ‘self-certified’ mortgages anymore. So, if you are a sole trader/partnership, it will be based on your net profit. And if you are a director in your own limited company, lenders will generally use your dividends plus directors salary, if you have more than 20% shares in a company, you are self-employed and not employed in mortgage terms.

Often a mortgage lender will request an ‘SA302’ which is an HMRC form which confirms your income declared and tax payable for a given tax year; the ‘tax year overview’ invariably requested with it confirms you have actually paid the tax. These are not routinely issued and must be requested from HMRC or its website. They are free but may take a few weeks to arrive so be prepared.

The difference between the roles of your broker and your accountant

It’s important to remember that it is your accountant’s job to legitimately and legally offset tax liability, whereas you need to show the maximum income possibly for mortgage purposes so whilst your broker and accountant can work together, they have different remits and priorities.

Why is tailored advice so important?

As always, be sure to obtain bespoke advice as everyone’s circumstances can be so different. For example, certain professions, such as IT consultants or some health professionals, may receive contracts and some lenders will take your income from contracts rather than the accounts, which can often mean a more generous lending decision.

The important thing to remember is that mortgage lenders are assessing your financial risk and want facts. As with all aspects of the application, honesty is the key; verbally inflating your income is pointless as all lenders check income proof and have done for some years now.

The Euxton team will be happy to look over your own set of personal circumstances and to give advice on the most suitable route for you.

September 2018