Help! Sole Trader Mortgage - take income after TAX?

rozbra

Thanks everyone, some really varied answers in here. Perhaps everyone does it differently then!

I think all I can do is keep badgering my mortgage advisor (already using a fee free whole of market advisor) to double double check. He is quoting a 5.5 times income multiple though (income AFTER expenses AND tax) so maybe if he'd taken the net profit (after expenses but before tax) then that would have just been a multiple of 4 times - so maybe it evens out after all that....

CONFUSING!

Thrugelmir

If I run a business with a £100k turnover, but the cost of the goods I sell is £80k.

Then my pre tax profit is £20k.

So should the lender offer me 4 times turnover or 4 times profit?

Lenders have no wish to understand your business just what you earn from the activity.

rozbra

Yes I would expect all lenders to want to see income after expenses/costs of goods etc and wouldn't expect any lender to take account of your turnover figure.
But this is an issue with lenders only taking into account your AFTER tax figure. SO in your example, it would be whatever is left after you've been taxed on your £20K.
That's what seems unfair if they are taking into account an employed person's annual salary figure (BEFORE their paye tax is taken off)

GMS

Request SA302 forms from Inland Revenue. The profit figure will be used for calculations.

Turnover less expenses will be the figure used, i.e profit before tax.

Wh05apk

Thrugelmir wrote: »

If I run a business with a £100k turnover, but the cost of the goods I sell is £80k.

Then my pre tax profit is £20k.

So should the lender offer me 4 times turnover or 4 times profit?

Lenders have no wish to understand your business just what you earn from the activity.

Thrugelmir I think you are getting confused, lenders will base lending on NET profit - i.e. turnover less costs, that is the equivilant of an employed persons gross salary.

I think the confusion is in the terminolgy, net profit is the equivilant of gross salary, i.e both before tax.

Lenders then use net profit less tax, and net salary in affordabilatity calculators.

GMS

Here is an Abbey Accountants reference template for sole traders.

Clearly explaining before tax as being the figure. It would be discriminating against self employed if after tax was used, as gross figures are used for PAYE salary.

http://www.abbeyforintermediaries.com/library/lib_61.pdf

Thrugelmir

Wh05apk wrote: »

Thrugelmir I think you are getting confused, lenders will base lending on NET profit - i.e. turnover less costs, that is the equivilant of an employed persons gross salary.

I think the confusion is in the terminolgy, net profit is the equivilant of gross salary, i.e both before tax.

Lenders then use net profit less tax, and net salary in affordabilatity calculators.

Hi, I'm merely illustrating that turnover in its self is no indication of pre tax profit.

rozbra

Thanks all for your help everyone and Wh05apk I think what you've said makes the most sense to me - so lenders should take pre-tax profit for self employed as their basic starting income figure but that they sometimes use an 'affordability' calculator method instead/as well to work out what they want to loan and for that they take the after tax figure (just as they do with employed people). So I guess I just need to clarify with my broker that the lenders are doing an affordability method... that sound right to people?!
I appreciate all the comments.

Jenniefour

Sorry - my mistake. Just checked and it was my income after expenses of my work and before tax.

opinions4u

The adviser doesn't underatand the difference between net profit and net pay.

The two are significantly different.

Find somebody who knows what they're talking about.