If you are self employed and looking for a mortgage you will have almost certainly been told one of the following:
‘you need 2 years trading’
‘lenders will only take salary and dividends from LTD companies’.
‘you cant use gross income’
To that, we say;
Here are our top 5 self employed mortgage hacks:
- How to be a ‘contractor’ instead of ‘self employed’
This is our first example of using your gross income.
If you have a contract with another business to provide them services some lenders will use the contract value. This is particularly common in IT for example, working on a daily rate. If you have a ‘daily rate’ particular lenders will use the daily rate over 46-48 weeks a year.
Let’s say for example, your contract is for £600 per day. A lender would assume 5 days work per week (unless stated otherwise in your contract) and 46 – 48 weeks per year (allowing for downtime!)
At 46 weeks per year, this gives an income for mortgage purposes of £138,000 or £144,000 at 48 weeks.
Clients ‘net income’ if assessed as a ‘self employed person’ is often far lower than their above ‘contractor income’. This has doubled the mortgage available for some of our clients.
The other advantage is that the minimum time in role can be shorter for contractors. If you are assessed as ‘self employed’, you need at least 12 months trading.
As a contractor, some lenders will use your income even in advance of your starting the contract. However this is only accepted if the contract you are starting will be a fixed term contract of 24 months.
To qualify you will likely need a year or two years experience in your industry or working as a contractor.
Daily rate contractors often don’t have a minimum contract length required.
- CIS slips for tradesmen
This is a very similar ‘hack’ as for contractors above..
If you work in the construction industry on a CIS basis you are probably very aware that your pre tax income on your CIS slips is a lot higher then profit on your sole trading tax calculations or limited company accounts.
Certain lenders will use the income stated on your CIS slips GROSS! A higher income figure being used almost always leads to a higher mortgage amount being available.
You will generally need 2 years experience working in your field or on a CIS basis.
Lenders will generally average the most recent 3, 6, 12 or 24 months CIS slips to calculate your income.
- Using limited company net profit
‘Lenders will only take salary and dividends from LTD companies’. This can lead to Limited company directors taking dividends, just to get a mortgage. If the dividend income wasn’t needed, this means paying income tax unnecessarily.
The solution is that certain lenders can use directors salary plus your share of net profit. This means you don’t need to drawn out dividends unnecessarily to get the mortgage you need.
The profit figure used is most commonly, after corporation tax but a small number of lenders.
- Adding costs back in (such as pension contributions or large one-off expenses)
This takes the ‘net profit’ solution to the next stage. On your accounts, the net profit figure can often be after pension or one off expenses have been deducted.
Certain lenders understand that certain expenses arguably don’t represent the ongoing profit. For example, pension would be taken post tax for an employed person (such as pension) or are one off such as buying machinery.
Some lenders will add specific expenses like these back on to the company profit, giving a bigger income and mortgage amount.
- Buying into a business
We speak to multiple clients a month who are told elsewhere that a lender ‘wont touch them with a barge pole until they have at least one years trading at the business’
For clients buying into an established business this is just not true.
The most common of these scenarios is where an employed solicitor, doctor, accountant or architect, has recently been invited to become a partner in the firm they work for.
The lender will assess the recent years income for the existing business and calculate your income as your projected share of it once you have joined.
Self employed mortgage with no trading history!
If you have been left disappointed after some mortgage advice elsewhere, but any of the above sounds like you, get in touch.