Self-Employed Net Profit Mortgage
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Self-Employed Net Profit Mortgage
Archie Thomas explains how using net profit works for a self-employed mortgage applicant.
How do you calculate affordability when using net profits as income?
Not all lenders allow us to use net profit, but some will. Generally, they’ll calculate your income from your share of that net profit. So if you’ve got a limited company with two directors, and both have a 50% shareholding, 50% of that net profit will be yours.
They will use the net profit share that belongs to you, as an average over the last two years.
Generally we’ll need the full and finalised accounts – that’s what the lenders will want to take the income from.
How many years of net profit figures do I need to apply for a mortgage?
Typically it’s based on two years of accounts, but some lenders may just go off one. This is something we would look into at the time. Best practice is to contact a mortgage broker and we’ll ascertain what the requirements are going to be.
Do lenders use the average net profit, the most recent year’s or two or more years’?
Generally it’s the average of the last two years. That’s what most lenders want to see.
How does my net profit affect the maximum mortgage I can get?
Typically speaking, when you use net profits it’s because your salary and dividends aren’t enough. We’d start by looking at salary plus dividends for your affordability, but sometimes net profit can change your maximum mortgage.
You may have taken a low salary and dividends, in which case we can look at the net profit your business has made over the past two years. Some lenders will allow this, although your options will be more limited.
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Income multipliers are really an outdated term in mortgages. Each lender now has different affordability metrics and it isn’t solely based on an income multiplier.
If you’re planning to use net profits, the best advice is to contact us and we can confirm how much you can borrow.
Can you use projected income to get a mortgage?
Some lenders will allow it. Generally, projected income needs to be provided by an accountant. And, again, the number of lenders who allow this is limited. If that’s a route people want to explore, contact us and we’ll be more than happy to help.
Is there a maximum Loan to Income ratio when using net profit?
There’s no maximum Loan to Income. It really just depends on the affordability. It will be influenced by your accounts and how much net profit is there. It’s going to differ with each lender and we would check the specifics for you.
Some lenders will allow you to borrow more, some will lend you less. Not all lenders allow net profits as income at all, so the best thing to do is check with us.
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Are there any minimum income thresholds for self-employed applicants?
There can be minimum income criteria for certain mortgages. An example is interest-only mortgages, where lenders often have a minimum level of income they want you to reach.
Again, it isn’t the same for every lender and will be down to their criteria – which can change at any time. We need to get all the information from a client and confirm the options at that point.
Are there different requirements for sole traders versus limited company directors?
Sole traders and limited company directors are viewed differently, but you’re still within the self-employed bubble.
The main difference is that a sole trader’s business is one legal entity. You’re personally liable for all the debts and obligations of the business. But for a limited company director, the limited company is a separate entity, so all personal assets are protected and any liabilities are limited to the company.
For sole traders, typically lenders want to see the net profits on your SA302s – your tax year overviews. If you’ve got full accounts at the point of application, they may want to see those too.
For limited company directors, most typically they look at salary and dividends. But you do have the option to use other forms of income, like share of net profit.
If I operate under multiple businesses, how do you assess total income?
This would depend on the lender’s criteria and how they’d assess the income. If you’re operating under multiple businesses, contact us and we can take a look.
Some lenders don’t like layering, where you’ve got one limited company that owns another limited company and you’re trying to use income from both. Some lenders won’t like that, whereas others do allow layering.
How can a mortgage broker help with a mortgage using self-employed net profit?
I think we’ve covered a lot here, and using share of net profit is actually more common than people might think. It’s quite easy to look at that with the help of a mortgage broker.
We can help package your case and tell you what the lender is looking for. Ultimately, we help you figure out your mortgage affordability.
As I said before, if there are multiple people in that limited company, your income could be based on your share of that net profit. It’s best to contact a mortgage broker – we’re happy to answer any questions you have.
Key Takeaways:
- Some lenders will use net profit as income for self-employed mortgage applicants, typically calculating it from your share of the net profit averaged over the last two years.
- Generally, two years of finalised accounts are needed, though some lenders may accept one.
- Income multipliers are outdated; lenders now use different affordability metrics.
- Projected income can be used by some lenders, but it usually needs to be provided by an accountant.
- Sole traders and limited company directors have different requirements, with lenders typically looking at SA302s for sole traders and salary/dividends (with the option for net profit share) for limited company directors.
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