Self Employment Mortgage

sambennett

Hello..

Been a deflating day today, I went in to the bank to ask questions about how much money I could borrow on a mortgage as a single first time buyer since I am self employed.

A little background info, I started my business back in 2016, where tax year 2016-2017 I earned very little in terms of what they class as 'profit' after expenses (since you are able to claim expenses from 5 years prior to opening the business) meaning my profit was very low.. 2017- 2018 was also similar with me not earning much as only the second year of the business and lots of overheads being claimed against income.

When applying for a mortgage, they ask for accounts for the previous 2 years (that being 16-17 and 17-18) therefore my average income according to them is extremely low. Meaning the amount I can borrow on a mortgage is no where near enough to buy the CHEAPEST property on the market.

What has frustrated me is that they do not take into account income before expenses, they do not take into account earnings from 2018 or 2019 and also the fact I have bookings for the whole of this year and next year scheduled in already.

According to the mortgage calculators online, to be accepted for a mortgage for the CHEAPEST flat or shared ownership property on the market (roughly £80k-100k) I would need to be earning over £23k in profit after expenses.

When I could afford to live and pay off mortgage and bill payments earning much less than this, This wasn't part of my business plan to have to earn this much per year just to prove I can pay the mortgage.. Does anyone have any tips on any other ways to be accepted or next steps?

lvm

You can almost put in your tax return for 18-19 - would this increase your average over last 2/3 years by much?

The lenders have to be seen as responsible lenders so if you're not showing a good history of income, they're doing the right thing by not offering you much (however annoying it is...I know, I'm self employed too!)

If it were me and your business can be worked on part time or you can pause it for a while I'd just get a job for 6 months in order to get the mortgage then go back to your business if you think you can easily afford the mortgage.

ACG

If your income was £1m and your expenses were £999,999 then you made a pound.

Those future bookings could be cancelled, the profit margins may alter, you may also have large expenses to go along with the bookings. It is not the lenders job to go through your future income and expenditure, who is to say you have not booked in Mickey Mouse jobs to inflate your income?

There are lenders who will work off latest years figures, but their rates will be higher.

To be straight to the point, you can not have your cake and eat it. You either have a large income after expenses or you dont. If you dont, then you can not afford a larger mortgage.

cns06

I had this exact problem. Took us 2-3 years to sort it by taking much more than we normally would out of the business to ensure our SA302s were showing enough income. Amusingly we paid that mortgage off in 4 years, yet they still questioned our affordability on the basis of 25 year mortgage. Go figure.

Its all about ticking the boxes for the banks these days. They dont actually need you to have income to support the loan, the critical thing for the bank is the value of the property. But thanks to the actions of some bankers who were lending more than what property was valued back on 08/09 have left us here.

sambennett

@ACG I understand that but it's unfair that employed people aren't scrutinised in the same way, they may lose their job? be made redundant? the business they work for may have the same issues my business could potentially have so how is it any different?

Either way, it's in a position where someone starting up their own business would likely have to wait a few years before being able to get a mortgage.. compared to someone employed for the last 3 months being handed it on a plate.

It's frustrating that although the previous year has been a great year, it will be averaged out with the year before (my first year, where I earned little and claimed tax for the previous 5 years of expenses towards the business)

ACG

There are lenders who will work off the latest years figures, but rates will be marginally higher.

But yes, self employed people need at least one years accounts as you can not evidence your income until you have 1 tax year under your belts. Someone employed can evidence their income much sooner. It is not fair, but that is life - I was in the same boat as you 6-7 years ago when I set up on my own.

01afraser4

sambennett wrote: »

Hello..

Been a deflating day today, I went in to the bank to ask questions about how much money I could borrow on a mortgage as a single first time buyer since I am self employed.

A little background info, I started my business back in 2016, where tax year 2016-2017 I earned very little in terms of what they class as 'profit' after expenses (since you are able to claim expenses from 5 years prior to opening the business) meaning my profit was very low.. 2017- 2018 was also similar with me not earning much as only the second year of the business and lots of overheads being claimed against income.

When applying for a mortgage, they ask for accounts for the previous 2 years (that being 16-17 and 17-18) therefore my average income according to them is extremely low. Meaning the amount I can borrow on a mortgage is no where near enough to buy the CHEAPEST property on the market.

What has frustrated me is that they do not take into account income before expenses, they do not take into account earnings from 2018 or 2019 and also the fact I have bookings for the whole of this year and next year scheduled in already.

According to the mortgage calculators online, to be accepted for a mortgage for the CHEAPEST flat or shared ownership property on the market (roughly £80k-100k) I would need to be earning over £23k in profit after expenses.

When I could afford to live and pay off mortgage and bill payments earning much less than this, This wasn't part of my business plan to have to earn this much per year just to prove I can pay the mortgage.. Does anyone have any tips on any other ways to be accepted or next steps?

While I appreciate your frustration, if there is little profit being generated at the moment then any potential lenders will see this an issue. Why would a lender take into account your income before expenses? These expenses of your business aren't going to disappear when you get a mortgage so it's not a true reflection of your own personal income - that's why the profit figure is used.

Additionally, lenders carry out affordability checks based on potential interest increases. So although you may be able to afford a mortgage at the moment based on your current profit, would you still be able to afford it if interest rates soared?

It's a difficult situation to find yourself in unfortunately.