Rejected mortgage :(

chopper78

Hi,

Our house has been on the market for two years and we finally accepted an offer on the house and found another house to move into.

I had no problem getting an agreement in principal from Halifax for the new mortgage but when it went to full application, they have rejected it The reason is that I own 45% of my company, which has been established for 12 years.

The past couple of years from an accounting point of view have appeared tough because of a couple of exceptional write off items (mainly tax writeoffs rather than trading write offs, and that's what you do with small businesses - sort the accounts to minimise tax) and so this hasn't affected my own earnings of around £38k per year consistently over the past 3 years, for which I have SA302s to back this up.

My partner earns £10.5k per year (as she works part time), with savings and equity in the sale of my house I have enough for the moving costs (estate agent fees, solicitor fees, stamp duty) and the deposit on a 90% mortgage.

The house we want to buy is £143,000 and so that is a £128,700 mortgage. I have an excellent credit rating (no arrears, no missed payments) and about £5000 on a credit card (0% deal), plus a £500 a month HP on a car. The new mortgage would only be about £100 more than the current one, which should be more than affordable since I am currently able to save about £500 a month...

So what are my options?

Thrugelmir

chopper78 wrote: »

(mainly tax writeoffs rather than trading write offs, and that's what you do with small businesses - sort the accounts to minimise tax)

Doesn't change the underlying profitability of the business.

Whatever your tax planning.

kingstreet

So the £38k you're talking about is your share of the net profit, not 100% of the net profit of the business? If that is the case, did Halifax appreciate that? Were you declined, or offered a lower mortgage amount?

After your outgoings, you need to borrow 3.1 x joint incomes which isn't too bad. Any dependents or other commitments like maintenance or childcare?

chopper78

Although I own 45% of the business, I collect 100% of the earnings (the other two shareholders are not active and don't currently collect dividends or anything, I have a different class of share to cover my earnings as a dividend).

I pay myself £603 per month as a salary which is 'taxable', and then I pay myself a dividend to make up the difference between the after tax salary and £3,300. So my monthly take home is £3,300 and has been for the past few months. It was previously £2,800 up until May, but up until May I had a company car. The car went in May, and I bought the new car and so my take home went up to cover the new car.

The profitability of the business this year is completely different, the financial year end is 30/11/11 at which point the company will have made a profit of £46,000. This profit figure takes into account the base salary, but then around £30,000 worth of dividends will have been paid to me, leaving £16,000 to be retained in the business.

In FYE Nov 10, the profit was only £2145 after a £16,300 salary but before dividends were paid out (£14,000, plus car), in FYE Nov 09, there was a loss of £9362 - no dividends but a full salary of £31,000 (plus car). In that year, there was an exceptional loss item of £18,500 which changed a £9000 profit into a £9300 loss. In FYE Nov 08, the loss was £12649 - again no dividends but a salary of £28045 was paid.

Annoyingly, in 2007 the profit was £23981 after a £26k salary, and in 2006 the profit was £31,430 after a £24k salary, so effectively the dividends over the past couple of years have been taken from retained earnings, but the business has very much turned around now and is profitable again, but as the financial year hasn't ended yet, we cannot show it.

Meeper

It is unlikely that Halifax will look at your accounts and understand that you have a different class of share protecting your dividends.

Ask them to get an accountant's reference from your accountant which will show exactly what your individual circumstances are.

Wh05apk

I think the issue here is that the company is suffering from declining profits: from your figures 2010, you earnt £16,300 + £2145 profit = £18445, 2009 £31,000- £9,362 = £21,638 (assuming they look at the whole picture to include retained profits/losses)

In these circumstances they will take the last years figure of £18,445, take off your car and credit card, you are effectively down to about £11,000, + your partners income, you are looking at 6.5x income.

Thrugelmir

chopper78 wrote: »

so effectively the dividends over the past couple of years have been taken from retained earnings,

Without retained earnings the underlying ability of the business to withstand future financial shocks is greatly reduced. On the face of it you have to continued to draw an increasing income from the business irrespective of the actual financial performance.

chopper78

I'm still not sure why the company accounts are relevant though, as I have the SA302s as proof of *my* earnings. After all, it is me taking out the mortgage, not my company or my company's fellow shareholders. If I only had 22.5% instead of 45%, then the company accounts wouldn't be used and I would be considered employed instead.

Or indeed if I was a regular employee in the normal sense for an employer who was having declining profits then again that wouldn't be taken into account, so I fail to see why just because I own the business this is seen as a bad thing rather than a good thing

chopper78

Thrugelmir wrote: »

Without retained earnings the underlying ability of the business to withstand future financial shocks is greatly reduced. On the face of it you have to continued to draw an increasing income from the business irrespective of the actual financial performance.

The £18,500 write off in 2009 was due to the write off of an asset we had purchased many years earlier (it was a company we bought, the operations were shifted into the parent and so that company was no longer trading. An error meant it was dissolved and so the asset had to be written off, otherwise it'd still be sitting there in the balance sheet amortising over a much longer period and the business would have generated a profit.

The retained earnings in the business were still tens of thousands at the last year end and will increase by a decent chunk when the next set of accounts are drawn up. Hence the reason my earnings are up this year.

(I know, I know, it is the banks I have to convince, but as you can imagine it is a very distressing time to think the house sale and purchase may well end up not going through because of financial performance years ago, not what is happening now)

Wh05apk

chopper78 wrote: »

I'm still not sure why the company accounts are relevant though, as I have the SA302s as proof of *my* earnings. After all, it is me taking out the mortgage, not my company or my company's fellow shareholders. If I only had 22.5% instead of 45%, then the company accounts wouldn't be used and I would be considered employed instead.

Or indeed if I was a regular employee in the normal sense for an employer who was having declining profits then again that wouldn't be taken into account, so I fail to see why just because I own the business this is seen as a bad thing rather than a good thing

The company accounts are relevant as in your case, they confirm the viability of your income, if the company had £100,000 in its accounts from previous years, but had effectively ceased trading last year, and you were paying £50k pa yourself from this, would you expect a lender to lend based on £50k? if you had less than 15% shareholding, the lender would treat you as employed and have to take a chance on the company.

chopper78

Or alternatively I could have made a stonking profit up to November 2010, and be about to cease trading now, and yet I'd be in a different boat because they are looking at figures from 10-22 months ago rather than the here and now as they do with 'normal' people.

The whole thing has seriously made me consider just packing it all in and just taking a regular job somewhere else