Help! Sole Trader Mortgage - take income after TAX?

rozbra

HI

Hope someone can help. My husband and I are self employed freelancers - so we come under the sole trader banner.

We are trying to get a mortgage and our mortgage adviser has told us that the income the lenders use to calculate how much we can borrow is not only after expenses but also AFTER tax.

This seems very unfair if the income they take into account for an employed person is apparently their basic annual salary (ie. before their paye tax is taken off).

Does this sound right to people?
Does anyone know if this is definitely the case?

many thanks

Thrugelmir

As a freelancer your gross income does not equate to someone in full time employment. As you incur expenditure in running your business. Your tax bill is also calculated in a different way. So the 2 are not comparable.

kingstreet

Net profit is used for the self-employed. This is your income net of capital allowances and other expenses and what is used to calculate your tax and NI.

It should be known as the profit you make, really.

It is broadly equivalent to the gross salary of a PAYE wallah.

rozbra

Thanks Thurgelmir
So do you know if this is definitely how mortgage lenders view and want sole trader's incomes - ie. AFTER expenses AND tax (I have differing reports from others, all say after expenses but some seem to think their income was judged before tax and others after tax)
I would love a definitive answer on what mortgage lenders take as your basic income (as a sole trader) to work out the amount they are prepared to loan...

rozbra

Hi Kingstreet - yes that is what I thought it should be: Net profit (after expenses but before tax) and yet my mortgage advisor wanted the figure after expenses AND tax and said this is what the mortgage lenders would use.
Anyone experienced this themselves?

kingstreet

rozbra wrote: »

Hi Kingstreet - yes that is what I thought it should be: Net profit (after expenses but before tax) and yet my mortgage advisor wanted the figure after expenses AND tax and said this is what the mortgage lenders would use.
Anyone experienced this themselves?

I can only guess the adviser is using an affordability calculator which uses net income for both the employed and self employed, so tax and NI would first be taken off both incomes?

billymadbiker

I am self-employed / sole trader.
My other half is full time / employed.

When we went to see hsbc regarding a mortgage they based the figures on my income after tax and expenses etc, so basically what I spent on fags and sweets over the year.
They took the last 3 payslips from my other and timed by 12 to get her annual income.

They then suggested we put her as the primary applicant as that would increase the amount we could borrow.

So, they deduct tax etc from self empolyed 'income'. They also suggested I could 'earn' more the next year by doing the same amount of work but not claiming as many expenses!

Jenniefour

I'm self employed sole trader and in all my property purchases and mortgage applications, four over 25 years, income after tax and expenses is the figure that's been asked for to determine what they would be willing to lend. As Thrugelmir says employed on payroll and sole trader are not really comparable. And lenders nowadays are paying much more attention to affordability as well for everybody such as interest rates rising in future. So gross salary for the employed on a payrole is not the only issue lenders are considering.

Not saying this is always the case with all lenders - nett income for self employed - because I don't know, I'm not a mortgage broker, but I can say it's always been the case with myself and I wouldn't be expecting anything different in this ecomonic climate if I decide to move again.

Wh05apk

billymadbiker wrote: »

I am self-employed / sole trader.
My other half is full time / employed.

When we went to see hsbc regarding a mortgage they based the figures on my income after tax and expenses etc, so basically what I spent on fags and sweets over the year.
They took the last 3 payslips from my other and timed by 12 to get her annual income.

They then suggested we put her as the primary applicant as that would increase the amount we could borrow.

So, they deduct tax etc from self empolyed 'income'. They also suggested I could 'earn' more the next year by doing the same amount of work but not claiming as many expenses!

I suspect the HSBC "advisor" is doing this incorectly, when I worked in a branch many years ago, you had to have a seperate authorisation to deal with s/e customers, as handling accounts seems to be a bit beyond many people!

Clearly the figure should be as Kingstreet says, your net profit before tax.

yogicat

I think that this is the advisor misunderstanding - I have just received an agreement in principle based on 4 x my net profit before tax (I am a sole trader). i.e. Income less expenses but not after tax. But it may be the mortgage company you are using. They all seem to do things in different ways. And that 4 x was also based on a pretty low LTV%. Suggest you follow the advice on using a fee free whole of market broker and hopefully (if they do their job for you) you will get a better deal than is currently being suggested.

Conrad

Definitively BEFORE TAX, but after expenses.

The confusion is where lenders like HSBC also do an afforability exercise usualy a 1 page document, where after Tax take home pay is used, but the starting point with all lenders is always before Tax.