Reaching your goal of buying a new home, possibly your dream home, or a holiday home is a fantastic achievement, and one you should totally be celebrating and enjoying. However we also know it can be one of the most stressful events in your lifetime (although many of us move more than once, so it can’t be that bad right?!).
Getting a mortgage when you’re employed is fairly straightforward – you will be able to borrow a multiple of your salary/joint salaries, and will need to provide payslips and maybe a few other documents.
But what about getting a mortgage as a business owner? Your salary is minimal – how does it all work?
Well for starters, just to confuse you, although we’ve been telling you for tax purposes you’re employed/an employee of your own limited company – for mortgage purposes you’re treated as self employed.
And unfortunately, that’s not where the complexities start and end. However, when you plan and prepare for your new house purchase we can help make this side of the process as smooth as possible for you (we can’t do anything about the rest of the process though I’m afraid!).
Tell your accountant about your goal/plan ASAP!
Trust me, we will thank you for it! Once you’ve decided that this is one of your goals, or you start to think about the reality of buying a new home please do tell us.
You’re probably wondering why, what have we got to do with it all – it’s a mortgage advisor you need, not an accountant! But actually, the sooner we know this is a goal of yours, the sooner we can help you reach this goal.
How can your accountant help get your mortgage?
When we first take on a client we will ask you your goals, and again at each annual review (as we know things change as time goes on!). If we know that one of your goals is to buy a property then we can help plan and get everything ready that you may need.
As a next step we recommend speaking to a mortgage broker asap too, to ensure you know your profit/income goal and required deposit. Some lenders will use your net profit figure from your accounts, some will use your salary plus dividends as your basis for income for your mortgage. So it’s important we know which basis will be used and the figures you’re striving for.
We can then use these figures as a starting point to prepare a budget. We’d work back from the required dividends or profit to establish your expense budget and sales targets for the next year (or time period leading up to when you’d like to purchase). And we’d plan saving what you need for your deposit too – to make sure you can save for your deposit and have enough money to live on.
We’ll also then be able to ensure you have the required salary and dividend mix – if you’re looking to use a lender that bases on dividends then we need to make sure you show the required levels on your tax returns for the amount of years required for that lender.
This may mean you pay extra tax for a few years if you need to show higher dividends than you actually need to take out of the business. But hey – if it means buying your dream house then you can stomach some extra tax for a few years – and as we’re planning properly the tax payments will all be planned in advance and catered for.
It will also mean that we can plan our workload and the jobs, and work with you, to ensure that your accounts are done as soon as your year end finishes, and your tax returns are done as soon as the tax year ends; so you have everything as quickly as possible and for when you need it (rather than us both rushing around and stressing to get them done!!).
So what lenders use which basis, and what information do they need?
As we mentioned before some lenders will use net profit from your limited company accounts, others will use your income figure (salary plus dividends) as the basis on what you can borrow.
There are currently only 2 larger lenders that work off net profit, but they both will work off different figures. There are other smaller specialist lenders that will work off net profit. These lenders will need to see your company accounts – at least one year, usually a minimum of 2 years accounts.
Those 2 larger lenders are:
- Virgin Money – they work off net profit after costs but before tax
- Coventry – work on net profit after tax. However, they will only use net profit in certain circumstances.
The rest of the main lenders tend to use salary and dividends, so will need to see your tax returns. There are variations on what figures they will use and whether they use the most recent year or an average of the last 2. The main lenders are:
- Platform (Co-op Bank)
There are lots of other lenders, but these are the main ones that are used for business owners.
And of course this is subject to change and based on our mortgage brokers current understanding of each lender’s criteria. For 100% clarification please refer to each lender’s website or directly.
Now this is all great, but what about if you’re not ready to buy yet, and you want to rent for a while, or even long term?
Again, it’s not quite as straightforward as if you were employed, and again you will be treated as self employed.
The rental agency will require a reference from us as your accountant to confirm your income (salary, dividends, and any other income you may have). They may also want to see your tax returns.
Generally we haven’t had an agency request your company accounts, but I wouldn’t rule this out, so best to have them all up to date and prepared just incase.
So again, please do keep us in the loop so we can be prepared, and help you to secure the rental property you’re after.
Disclaimer: This blog is general advice, and no substitute for tailored advice specifically for your personal situation. All details were correct at the time of publishing.
Now we’re not mortgage brokers, and therefore can’t give you specific advice on actual mortgages and lenders; so If you’d like us to recommend a mortgage broker who can assist you with choosing the right lender and product please do drop us an email on email@example.com and we can give you the details of who we use ourselves, and recommend our clients to.
If you’d like to speak to us about planning for your first or next home purchase, and seeing how we can help you reach your goal please click the button below to complete our quick questionnaire and book a discovery call with us!