Running your own business comes with a wealth of benefits and freedoms. However, when it comes to getting a mortgage as a business owner, you may need to jump through a few more hoops than someone who is a contracted employee.
Whilst perhaps more challenging, it’s certainly not impossible to secure a mortgage as a business owner. There are plenty of lenders out there who are familiar with business owners and willing to lend. In this article, we are going to explain a few things that you should know about how to get a mortgage as a business owner.
Why is it more difficult to get a mortgage as a business owner?
Generally speaking, the income taken by a self-employed business owner can be more variable and less predictable than that of a contracted employee. As a result, lenders will assess the affordability of any mortgage facilities they might offer in a slightly different way. Sometimes a little more stringently.
The way business owner’s take their remuneration can also vary. The amount taken will often be dependent upon the underlying performance and profitability of their business. Understanding and being able to explain this can be key to a successful mortgage application.
The way a business owner takes their remuneration is often designed to minimise their personal tax charges. There’s usually nothing suspicious going on here. These remuneration methods will generally have been recommended to them by their Accountant. However, this can sometimes make things a little harder for a mortgage lender who is trying to assess an applicant’s income and outgoings.
Evidencing an applicant’s income is often the biggest difficulty for a lender when assessing a mortgage application from a business owner. Enlisting the help of a specialist mortgage advisor and broker, such as us here at Mortgage Light, who understands the different remuneration structures used by business owners and who also knows the right mortgage lenders to turn to, could make the difference between a successful mortgage application and a rejection.
How will I evidence my earnings as a business owner?
Business owners’ income can vary year by year. For this reason, the majority of lenders will want to base their assessment of your earnings on an average of the remuneration taken over a number of recent years, rather than base their assessment on the figures in the last year’s financial Accounts.
They will usually ask for at least three years’ finalised Accounts and/or tax returns to work out this average. If you are the owner/director of a limited company, then a brief breakdown of how you take your remuneration may also be useful.
You can expect to be asked for any, or all, of the following in support of any mortgage application:
- A minimum of the last three years’ Accounts for your business, certified by an Accountant where appropriate
- Copies of personal bank statements covering a minimum of the last six months
- A minimum of the last two years SA302’s and overviews
In most cases, you will need to have been trading for a minimum of 12 months to be able to get a mortgage as a business owner. You’ll also need a minimum 5% cash deposit, just like any other buyer. However, putting down a larger deposit of 15% or more will give you access to a fuller range of specialist lenders who may be better placed to help you.
It’s also worth noting that the way a lender assesses a business owner’s income can differ. It will depend on what type of legal structure they operate under. Lenders will generally approach things slightly differently for a sole trader, a partner in a partnership, or a director of a limited company.
- Sole trader – a mortgage lender will base your income on the net profit generated by your business as evidenced by your Accounts or your annual tax return
- Partnership – a mortgage lender will base your income upon your share of the net profit of the partnership as detailed in the partnership agreement, or by dividing the profit by the number of partners
- Limited company director – a mortgage lender will base your income upon any salary drawn and the dividends taken, as evidenced by the Company Accounts and your annual tax return. They also may consider retained profits.
As a company director, your Accountant may have recommended that you take a minimal salary up to the amount of your individual personal tax-free allowance and then take the rest of your remuneration in dividends.
Find out more – ‘Getting a mortgage with a limited company’
What if my business is growing?
Perhaps you have a business – and therefore an income – that is growing. You may want a lender to base their assessment of your mortgage application on a higher income than that averaged in the last three years.
You’ll need to support your application with an explanation of why you believe a higher income will be sustainable going forward. This may be evidenced by new contracts secured or growth in the sector. Bear in mind that lenders generally take a very cautious approach. Whatever evidence you offer will need to be fairly robust.
Generally speaking, if you are looking for underwriters to take a view on future earnings, you will need to access specialist lenders. This may mean paying a small premium for their bespoke approach and products. A good mortgage broker will know the best lenders to approach and how to present your application to them.
What happens if I have changed my business legal status recently?
It is not unusual for a business to change its legal status during its lifetime. This commonly happens when sole traders incorporate into a limited company as they grow and take on additional employees and liabilities. If you don’t have a full year’s trading under your new legal status, however, then this can make getting a mortgage as a business owner a little trickier.
This is because lenders will often consider a business under a new legal status as a new business. They will require one to three years’ worth of trading Accounts to establish profitability. This can be frustrating if you have basically been running the same business for a number of years.
As mentioned above, there are specialist lenders out there who will be more flexible and open in this situation. They may be happy to consider the operation of the business under the previous legal status as evidence of earning potential, even though it technically will have ceased trading.
There’s a lot to consider when getting a mortgage as a business owner. It’s important that business owners turn to a qualified and experienced mortgage broker and advisor to help them. At Mortgage Light, we understand your business. We know how to present your financial records to a prospective lender in order to give you the best chance of getting a mortgage. Just contact us and we’ll put you in touch with a member of our team.