Self-Employed Net Profit Mortgage
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Self-Employed Net Profit Mortgage
Diarmuid Phoenix explains how using net profits as income can help when applying for a mortgage if you’re self-employed.
How do you calculate affordability when using net profit as income?
Some mortgage lenders can use net profit as income, which is quite common for self-employed applicants and certain limited company directors.
The affordability is calculated in a fairly consistent, structured way with most UK lenders. Net profit is the business profit after allowable expenses, but before tax. Lenders will use, for example, a multiple of between 4 and 4.75 of the net profit to calculate the loan.
How many years of net profit figures do I need to apply for a mortgage?
Most mortgage lenders will ask for two full years of net profit evidence if you’re self-employed or a company director. Some lenders will make exceptions.
For example, some will accept one year’s net profit if you have a strong trading history in the same industry. Often they’ll ask for an accountant’s reference or projection for the following year, to go along with that.
Do lenders use the average net profit, the most recent year or two or more years?
Most look at two years and then adopt one of three approaches. The most common way is to average the last two years – they’ll add them together and divide the total by two, and that will be your average income.
Or, they’ll take the most recent year – but only if profits are rising. If profits are not rising, they’ll take the lower of the two, even if it wasn’t the most recent year.
How does my net profit affect the maximum mortgage I can get?
Your net profit directly drives how much you can borrow – in the same way that an employed person’s salary would. It’s identical whether you’re self-employed, sole trader or run a limited company.
A lender uses your net profit as the income and then applies a maximum income multiplier. That multiplier is the same for net profit as for an employed salary. It’s usually a multiple of between four and 4.75.
Can I get different income multipliers based on net profit when applying for a mortgage? Do lenders apply a lower income multiple for self-employed applicants?
Income multipliers can vary, even for the same net profit. It will depend on a few different factors – lenders don’t treat every self-employed applicant the same.
The factors which can affect this can be rising or falling profits in recent years. As profits can go up and down, lenders might use a different multiple on recent profit compared with the average profit over two years. The type of business and industry can also affect the income multiple.
Loan to Value is also a factor. With a small deposit, the lender is risking a higher percentage of the property value when lending. Even if the net profit is the same, somebody with a bigger deposit may get a better income multiple there.
Credit score can affect that too, and even the length of the mortgage term. A shorter mortgage term can sometimes, but not always, land you a higher income multiple.
Can you use projected income to get a mortgage?
Yes, but there are limitations and they’re quite strict. Lenders generally prefer historic income evidence rather than projected income – because self-employed income can fluctuate, as we all know. They won’t lend solely on projections.
They may have done in the early noughties, but since the 2008 crash we’re not going to see that again. Now they require at least one to two years’ historical accounts, or SA302s or tax calculations. Projections are mainly used as supplementary evidence, especially if profits are rising.
It’s not often they’ll allow projections for startup businesses with no track record in the industry, even if you have a year’s accounts behind you.
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Are there any minimum income thresholds for self-employed applicants?
Most UK lenders set a minimum income threshold for self-employed applicants, but it varies between lenders and depending on the size and type of mortgage.
Again, there’s no hard and fast rule, but an example is that for a sole trader, a lender might have a £12,500 minimum net profit, or for a company director it might be £13,000 as a combination of salary and dividends.
Are there different requirements for sole traders versus limited company directors?
In assessing income, yes. UK lenders treat sole traders and limited companies differently. For sole traders, they use the net profit of the business. It’s fairly straightforward in that sense.
For company directors, it’s different. It can depend on their shareholding, for example. If a director or shareholder owns more than 25% of the business, they’ll be treated as self-employed. If their share is less than 25%, sometimes lenders just use salary on its own.
The majority of company directors are usually significant shareholders, in which case lenders can use a combination of salary plus dividends, while some offer salary plus the share of net profits from the company.
That can be quite beneficial for some applicants. It usually allows them to borrow a significant amount more than using salary and dividends
If I operate under multiple businesses, how do you assess total income?
We would typically combine your income from all the relevant businesses. The approach will depend on your role, your shareholding and the evidence available.
Generally, lenders combine net profit and salary and dividends from all businesses that you control or significantly influence. That’s only for businesses that are ongoing and profitable, and you’ll obviously need to provide evidence. The documentation needed can vary between lenders based on their specific criteria.
How can a mortgage broker help with a self-employed net profit mortgage?
Speaking to a broker is always the first thing you should do. We know our way around the market and criteria, and can help you navigate through all of it in a smoother, more efficient way. Most people lack the time or the inclination to do this by themselves.
Key Takeaways:
- Affordability is generally calculated by applying a multiple (typically between 4 and 4.75) to the net profit, which is the business profit before tax but after allowable expenses.
- Most lenders ask for two full years of net profit evidence, but exceptions can be made to accept one year if you have a strong trading history and can provide an accountant’s reference or projection.
- When assessing income, lenders often take the average of the last two years’ net profit. They may take the most recent year’s profit only if profits are rising; otherwise, they will use the lower of the two years.
- For sole traders, lenders typically look at net profit. For limited company directors who own more than 25% of the business, income is usually assessed as a combination of salary plus dividends, or salary plus the share of net profits.
- Lenders do not lend solely on projected income. They require at least one to two years of historical accounts (SA302s or tax calculations). Projections are used mainly as supplementary evidence, especially if profits are rising.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The information contained within this article was correct at the time of publication but is subject to change.
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