Self employed sole director, salary multiples, and pre-tax company profit.

carl0s

I'm a little worried and put off. I did a little bit of searching this afternoon, and I'm hearing that the banks will look at my salary (£6k) plus my tax-free dividend (£20k), when looking at what they will lend me.

It is my accountant's view (and I agree), that they should be looking at my salary plus the pre-tax profits of the company, in order to give an equivalent gross income to a normal salaried person.

When they ask for earnings, they are asking for pre-tax earnings. So why are they looking at post-tax earnings (dividends) with me? Or will they simply multiply my figure by 1.2ish when considering what they'll lend anyway?

I'm hoping to call First Direct, or HSBC, to look at borrowing £125k and putting down a £42k deposit to buy a £165k house. From what I can see, First Direct offer much the same deals as HSBC but with £100 lower booking fees, and slightly different LTV bandings on the packages. I know they are the same company.

carl0s

Sorry, I should add that I work for myself and have done for 10 - 11 years. I have been running as a limited company for about 6 years I think.
I take the basic allowance as a salary (£6k ish) and the rest as a dividend (£19k - £25k). I, or rather the company, pay about 20% corporation tax on the profits which is what leaves the £19k - £25k. So in effect, my "dividends before tax" are 20% higher, hence the query.
It's the usual contractor style setup that should be familiar to a lot of people.

opinions4u

borrowing £125k and putting down a £42k deposit to buy a £165k house

I'm assuming you're working under 75% LTV. These figures don't add up.

It's many years since I was a mortgage underwriter. The income figure I'd have taken in these circumstances would have been net profit with salary and dividends added back in. But different lenders can use different criteria.

If it falls through with FD, see a broker.

carl0s

opinions4u wrote: »

I'm assuming you're working under 75% LTV. These figures don't add up.

It's many years since I was a mortgage underwriter. The income figure I'd have taken in these circumstances would have been net profit with salary and dividends added back in. But different lenders can use different criteria.

If it falls through with FD, see a broker.

I'm aiming for 75% LTV. I know that £125k + £42k equals £166k and not £165k, but I'm going on the basis that I might have £1k of charges or something, which (with a lender other than HSBC/FD), might be added onto the mortgage. Is that what you meant about not adding up or was it something more intricate than literally those numbers not adding up?

How do you think I'll do? I'm worried that a broker will end up offering me around 4% instead of the 2.99% that HSBC/FD are offering. I gather HSBC will, in the 75% LTV banding, offer 4.5x my average earnings of the last three years. I need this to be pre-tax for me to be able to borrow what I want.

carl0s

When you say "net profit with salary and dividends added back in"? What do you mean?
The company's net profit is the same as my dividend isn't it, on the basis that I am the company in practical terms and I take what it earns as a dividend.

Why would you look at net profit rather than gross? With a salaried person you look at gross.

opinions4u

carl0s wrote: »

When you say "net profit with salary and dividends added back in"? What do you mean?
The company's net profit is the same as my dividend isn't it

I have no idea. I haven't see the accounts. It certainly doesn't have to be.

Why would you look at net profit rather than gross? With a salaried person you look at gross.

Gross profit is before expenses attributable to the business. These expenses could include salaries and dividends.

Net profit is the amount that the business declares to calculate tax liability against. Profit after tax would be a lower figure.

carl0s

opinions4u wrote: »

I have no idea. I haven't see the accounts. It certainly doesn't have to be.

Gross profit is before expenses attributable to the business. These expenses could include salaries and dividends.

Net profit is the amount that the business declares to calculate tax liability against. Profit after tax would be a lower figure.

Ah OK. Net profit = pre-C/T profit. That sounds like what I was hoping for then. I thought net profit would be after paying corporation tax.

I think I feel better about the outlook now. Should I ?

thanks!

mp80

FD look at pre-tax profits (which is essentially comparable to gross salary of a FTE as your business is not liable for your personal mortgage)
I am in the same boat however I have since gone back to a permie role, but had no problems getting a mortgage

carl0s

mp80 wrote: »

FD look at pre-tax profits (which is essentially comparable to gross salary of a FTE as your business is not liable for your personal mortgage)
I am in the same boat however I have since gone back to a permie role, but had no problems getting a mortgage

Thanks for that. I feel a bit more positive now!

carl0s

First Direct said yes, provionally. It's their 2.49+base product. Just awaiting application forms to send off.

Since I have apparently got the product I wanted, after looking at many tables of rates, rather than being fobbed off onto a more expensive deal because I'm higher risk or anything, well is there any point at all in allowing brokers from the estate agent to look for mortgages for me?

I don't think a 2.49%+base tracker with a £499 fee + £200 survey/admin fees, can be beaten on my figures (borrow £123.5, £42500 deposit, or thereabouts). Not by anybody that wants me to know about it anyway. What do you think?