Self Employed New Mortgage Headaches

FeistyFidget

When we brought out current flat 3 years ago, it was under the FTBI scheme and I was in full time employment. Since then, I have become self employed and the FTBI fees have gotten so high (an extra £123 a month on top of mortgage, rising to £250 a month next year) that we can-no longer afford to live in our lovely home.

The reality is that it is going to work out cheaper to move to a three bedroom home with a 90%LTV mortgage then continue living in our two bedroom flat with all the hidden costs that go with it.

I was sadly misled that self employed people are given the edge of taking gross income into consideration when applying for a mortgage (how could I have been so naive?)

My business is fledgling and looking at the accounts from April 2011 to April 2012, there was only a net of just under 10k Of course, when it came to tax relief, I claimed back the portion of utilities that my office takes up, uniform washing costs etc etc. My gross was close to 23k and staff costs were probably about 9k.

So my question is this, do I sacrifice shouldering the cost of utilities and other business related costs (that fall into that decidedly gray area of taxable) to try and get my net income bumped up on paper?

I am really panicking about the liklihood of us being offered a mortgage with my self employed status. I have run my current net income through some of the bank mortgage calculators and the amount is scarily paltry.

We know we could afford to make the mortgage re-payments as we are currently doing so! Plus we have recently cleared all other debts which has freed up an extra £300 a month. Pity the bank would not be able to assess our suitability based on past mortgage re-payments/bank account activity

ACG

There are other things you should be aware of that may cause issues.
If you have less than 25% deposit you may need upto 3 years worth of accounts. Also lenders generally take an average of the previous 2-3 years accounts, so you may get less than your expecting.

However, if your trying to increase your income then obviously the less you claim back the better, do you actually use any electric etc at home or do you have a seperate office?

I dont think at 90% ltv you will do this with 2 years accounts.

FeistyFidget

Thanks AVG

My business has been operating since early 2010, however I left full time employement to use the business as a sole income exactly two years ago.

We are currently saving for a deposit of just over 10% and we 'should' have another £5k or so tied up in our current property. I think we will have a 15ish% deposit all said and done.

We also plan to wait until our current mortgage deal ends (don't want to have to port it over or face early repayment fees) so will not be looking to move until Spring 2014, by then I will have 4 years of business records for them to see.

I run the business from home, our second bedroom is used solely as my office. We were advised to calculate all mortgage and bills based on the square footage of that room. This includes;
Lighting
Heating
Insurance
Mortgage interest
Council tax
Water rates
Phone
Internet
etc

So should I be excluding these as they add up to a fair bit each month. It could possibly increase my net by a 2k.

kingstreet

I was sadly misled that self employed people are given the edge of taking gross income into consideration when applying for a mortgage (how could I have been so naive?)

Net profit for the self-employed is comparable with gross salary for the employee.

Both are the income taken before the deduction of tax allowance, income tax and national insurance.

FeistyFidget

Thanks Kingstreet, found that out the hard way A well meaning family member had told us 6 months ago that we could use Gross rather then Net to 'bump it up' on paper.

This is why I'm asking if it would be wise to try and claim back as little as possible so that my Net stands a better chance of being mortgage approved

kingstreet

From what you've said, you're only talking about a couple of grand and on 4x income, that's all of £8k difference. Is that enough to make it worthwhile?

A lender will normally take your latest year's net profit as the figure it uses for income, unless there have been dips in the three year period, then it may be an average of the three years instead.

Thrugelmir

FeistyFidget wrote: »

This is why I'm asking if it would be wise to try and claim back as little as possible so that my Net stands a better chance of being mortgage approved

Better to reduce your tax bill. Then use the additional income to overpay your mortgage.

FeistyFidget

Sadly, yes £8k could really make the difference.

Thanks Thrugelmir, now to decide if that money would be better served in an ISA towards increasing deposit, or as you suggested; over-paying mortgage.