Self Employed and Mortgage Applications

February 20, 2018

Applying for a mortgage today is a lot different from what used to happen 10 years ago. The amount of due diligence required from the lender is extensive and cumbersome. 


Imagine how hard it is to get a new mortgage when you have just become self employed? Quite frankly it's a nightmare. Mortgage companies love the idea of steady income to meet the ongoing payments. Self employed just means uncertainty for them.


Banks always ask the question are you employed or self-employed? Their definition is different from the tax position. If you own a limited company and pay yourself a salary then you are employed.  However the banks will consider you to be self employed. If you own over 20 or 25% of a business then you are deemed to be self employed.


I was recently going through a mortgage review with Virgin Money. Once they established that I was "self-employed" they ask for the profits of the business over the last two years. In one year there was a small loss. I could hear the sharp intake of breath on the other end of the phone. The conversation continued to the point where we were near the end of the call. I then remarked "In the year the company made a loss I was paid a salary. But you haven't asked what that was?" The answer was a little shocking. "As you are self employed we only look at the business profits. If these are small we then ask for salary details".


Prodding this a little further I suggested "So if the business makes a profit of £1 after paying the owner a salary of £100,000 you would take the £100,000 into account. However if the business lost £1 after the same deduction of salary then you would not look at the £100,000 salary?" The answer was a simple "Yes" although the adviser did say that it sounded absurd. 


Mortgage companies also cannot understand the concept of directors' loans. If you have invested cash into a business you are able to withdraw that money tax free (just don't take out too much)! So you can be "earning" a small salary but drawing down on the directors' loan accounts as well. Mortgage companies never ask about this "income".


So the answer to getting a mortgage if you are self employed is as follows.


1. Make sure you have a profitable business

2. Find a mortgage adviser who can support you with your application.


We are not financial advisers so we like to recommend others in the area. One company we do like a lot is Bespoke Mortgage Advisers. They have worked extremely hard with a number of clients to get the loans they need.




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