Self Employed and buying your first property?

Being self-employed: is it better, worse or no different when buying a property in the UK?

At City & Country we cater for all sorts of clients from employed to sole traders and directors of Ltd companies.

I am often asked by my clients: “Sebastian, I was told that being self-employed makes my mortgage application more difficult, is it true?”

At City & Country we cater for all sorts of clients from employed to sole traders and directors of Ltd companies.

I am often asked by my clients: “Sebastian, I was told that being self-employed makes my mortgage application more difficult, is it true?”

First scenario

Firstly, let's investigate a typical sole trader running a small business. I will do this based on Q&As from questions I am typically asked.

Q&A #1

• Client - Sebastian, I receive an average of £10k per month from being a plumber. Clearly I can get a big mortgage?
• Sebastian - Well, this is great but £10k is treated as your turnover and after this hits your account you will claim your expenses and other costs. What really matters here is what is the income you pay tax on?

Q&A #2

• Client - Everybody tells me that I will not be able to get a decent mortgage as a sole trader.
• Sebastian - Well, this will depend mostly on how much money you submit for tax purposes. If you submit £12k as your taxable income for each year of trading this is how much will be assessed for mortgage purposes. If you submit £40k as taxable income, that is how much will be assessed. So often I meet with clients who have a high gross income but their expenses are so high that their final taxable income is around the Personal Allowance.

Q&A #3

• Client - I have been running my business for 18 months, can I get a mortgage?
• Sebastian - Yes, but there are fewer mortgage lenders to choose from than if you have been running your business for at least two years.

Q&A #4

• Client - Can I show my bank statements to confirm my monthly income?
• Sebastian - we will ask for them and assess but most importantly we must see the tax calculation, clearly showing money earned and on which tax is paid. This is commonly called the SA302 or tax computation.

Second scenario

Secondly, Let’s look at a typical scenario where husband and wife are 50-50 shareholders and they each take an annual salary of £12k. In this case we have a few options which must be checked for clients in order to properly recommend a mortgage product.

Q&A #5

Are salary and dividends paid from profits the company is making? While salary is a cost for a company, dividends can only be declared if the company makes a profit in a financial year. If this is the case, dividends can be declared and this together with salary is taken into consideration when applying for a mortgage. So if each client takes £30k dividends we would submit that each annual income equates to £42k for mortgage purposes (his/her annual salary plus dividends declared.)

Q&A #6

Sebastian, but you made a point above that running a business might be more beneficial for a mortgage application?

Well, this is true, and you can see below why. We always look at the company’s accounts in detail, as sometimes there are different ways to calculate a client's income if running a Ltd company. As per the examples above, we have clients/directors taking £12k annual salary but we have discovered that they actually do not take any dividends from their company! So is the clients’ income just £12k each x 2 = £24k joint? We always carefully study accounts to make the best recommendation. We can see that despite the Ltd company making a profit, clients do not take any dividend (they might have other sources of income). In this case we can look at the company's profits.

The table below will illustrate this better.

£1,000,000 turnover

£750,000 company costs including £12k salaries

£250,000 company gross profit

£47,500 corporation tax

£202,500 company net profit

The profit above is shared by shareholders/directors and there are banks which will take this income into consideration. So in this example, despite clients not taking any profit as a dividend they can use this profit to support mortgage application.

Husband’s income taken into consideration for mortgage application: £12k salary + £101,250 = £113,250

Wife’s income taken into consideration for mortgage application: £12k salary + £101,250 = £113,250

So in this example. the income which can be used for mortgage application is £226,500 despite the clients not taking any dividends from their business! And this is exactly why running a Ltd company might be more beneficial when applying for a mortgage.

Other questions I am asked on regular basis:

Q&A #7

• Q: I am a director/100% shareholder in a Ltd company and I’ve started paying myself a £60k gross salary since I’ll need a mortgage in 3 months’ time. Will this income be used for mortgage purposes?
• A: If the client is a shareholder in a company he is usually treated as a self-employed person so unfortunately this would not be so simple. Again, before applying for any finance we would check whether paying yourself £60k per annum is detrimental to the company’s accounts. Generally speaking, banks will want to see the client's personal tax calculation together with company accounts to ensure that income has not been manipulated for mortgage purposes.

Q&A #8

• Q: I am a director/100% shareholder in an Ltd company and I employ my wife on a £60k annual salary. Will she be able to use this income for mortgage purposes?
• A: Again, this will not be so simple, since the wife would be seen to be working in a family business and again we/the bank would need to check that this employment has not been created for mortgage purposes.

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