I’m going to outline it all for you, plain and simple. Here’s what not to do, and why it’s such a huge mistake.
…is going directly to a bank or mortgage lender. Unless you have the know-how to search out the best mortgage rate and are 1000000% certain the lender is the best on the market: PLEASE don’t do it!
98% of mortgages lenders (the ones you’ll try to approach on the high street) want to average out your last 2 years net profit or your total income received. If your business income is growing, this puts you at a disadvantage. More often than not, the lender won’t give you the mortgage you need or they just outright say no, leaving you stressed and anxious about buying your dream home.
For example, last tax year your total income was £10,000… but this tax year business has grown massively, and you’re now able to show a total annual income of £40,000. Do you know what the 98% will do? They’ll average you back down to £25,000.
As a rough guide: 4.5 x £25,000 = a £112,500 mortgage, or would you prefer 4.5 x £40,000 = a £180,000 mortgage.
Don’t fret, here’s what you can do to avoid mistakes. For the sole traders and business owners:
The 2% of lenders that will use your latest years profits and/or income will significantly increase the amount you can borrow, as shown in the example above. It’s all about using the right lender. They don’t want to say no, but they don’t want to work with you either.
Another big issue you’ll want to think about is doing your tax return. Whether you’re a newbie, or even if you’ve got years of experience filing your tax return, you’ll still be far better off speaking to a mortgage adviser first. Getting an adviser to see how much you can borrow and what you’d need to declare on your tax return can really give you some peace of mind when it comes to applying for a mortgage. Having that conversation before you submit your tax return is the difference between getting your dream home and not.
It doesn’t have to be myself you speak to, or even another broker, this isn’t a promotion. In your shoes I would speak to someone who can calculate how much you can borrow and really knows the different lender’s criteria. And if you’re lucky enough, they’ll manage the process from beginning to end, making life easy for you.
You can be assessed similarly to the above using your salary and dividends, however here’s another tip for you.
If you leave a lot of profit in your business, then great, this can be used to help you get a mortgage! But only 5 lenders in the market place (currently) are up for that. They’ll accept the applicant’s (this is you) gross share of net profits (before dividends) for the most recent accounting period. So add your share of net profits to your salary to get an idea of how much this improves your situation. Going at it as a limited company will drastically increase your borrowing if you’re looking for a sizeable mortgage, compared to just using your self-employed income. Thank me later.
Any decent broker will be able to calculate how much you can borrow and will manage the process from beginning to end. It’s their job to make it easy for you… and it’s my pleasure to give you some tips and advice to help you along the way. See my quick checklist below…
Consider this your first mini check list for getting a mortgage, tick off the following and you’re on your way to owning your dream home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The actual rate available will depend upon your circumstances. Please ask for a personalised illustration.