SELF-EMPLOYED SOLE TRADERS – MORTGAGES HAVE COME A LONG WAY BY DANIEL MCLARDY
According to the BBC in July 2018, the UK is embracing self-employment. Since the financial crisis the rate of self-employment has increased exponentially, now making up in excess of 15% of the working population (4.8 million). The reasons for the trend are complex, with the “desire for flexibility” and “having no other choice in the post-financial-crash age” being cited. However, as a mortgage broker serving the whole of the UK we deal with self-employed clients on regular basis and, from the coal face, we regularly hear the same common motive for self-employment – control of one’s own destiny. Mortgage lenders, generally speaking, now agree with this notion. The self-employed, for the most part, do have control over their own success where their employed counterparts face the risk of involuntary redundancy. The attitudes of lenders has evolved notably in recent years, with the self-employed no longer regarded as an inordinate lending risk.
WHAT IS SOLE TRADER SELF-EMPLOYMENT?
This post deals with self-employed sole traders who run a business as an individual, submitting earnings each year via their self-assessment tax returns. A sole trader may submit their tax returns with or without the assistance of an accountant. You may be self-employed via a limited company or other means – if so I intend to cover this in a separate article.
WHY HAVE LENDERS COME TO TAKE A MORE POSTIVE ATTITUDE TOWARDS THE SELF-EMPLOYED?
It’s in the evidence. In modern times lenders have come to realise that, while the self-employed may pose a higher than average lending risk, this risk is not intolerable. They also accept that the World is changing, and the workforce is becoming more entrepreneurial and creative about earning a living. Lenders, like many other institutions, must adapt to societal change.
HOW IS SELF-EMPLOYMENT INCOME TYPICALLY ASSESSED
Typically lenders use the latest 2 years “profit from self-employment” from your tax calculations, which is the same as your pre-tax net profit from your trading activities. The 2 year average is then the basis from which lending potential is determined. If your latest year profits are less than the previous year, it is not uncommon for a lender to use this lesser net profit on which to base their lending and not the 2 year average.
MY PROFITS HAVE INCREASED SIGNIFICANTLY – CAN MY INCOME BE ASSESSED ON THE LATEST SELF-EMPLOYMENT FIGURES?
Typically lenders use a 2 year average of profit from self-employment. However, there are a select few who may be willing to base lending on the latest year of profits under certain circumstances. You can expect such lenders to seek evidence for the reason behind the significant jump in profits and sustainability going forward, and applications of this type are assessed on their individual merits, making the outcome less of a certainty. We can guide you on whether this is a possible route of approach for you.
MY PROFITS HAVE DROPPED SIGNIFICANTLY IN THE LATEST FINANCIAL YEAR. IS THIS A PROBLEM?
Yes, this could pose an issue for lenders as they would be concerned about a continuing downtrend impairing your ability to make your mortgage payments. However, the extent of the variance and the reasons are both factors that could affect the lending decision. A significant drop in profits may not mean you cannot get a mortgage. We can guide you on this if you find yourself in this position.
WHAT EVIDENCE IS REQUIRED FOR SELF-EMPLOYMENT INCOME?
Typically a lender will require the following:
(1) LATEST TWO YEARS OF TAX CALCULATIONS Also known as SA302s, your tax calculations can be downloaded from your HMRC internet portal or issued to you by your accountant (if you have one). They must be shown to be “100% complete”, with the typical stipulation for the latest return not to exceed 18 months from the tax year end (5th April). Please note that where 3 years of figures are available, we will ask you for the additional year to further support your case and our assessment of your circumstances.
(2) LATEST TWO YEARS OF TAX YEAR OVERVIEWS (TYOs) Again, this document can be downloaded from your HMRC internet account, and is the summary of the income tax you either owe HMRC or are due for rebate. Please note that where 3 years of documents are available, we will ask you for the additional year to give us a fuller picture on which to base our advice to you.
In certain circumstances additional documents may be required:
(1) ACCOUNTANT’S LETTER CONFIRMING SUBMISSION this is required where an accountant has submitted a tax return on your behalf using their own software, thus generating a tax calculation document that is not direct from HMRC. Such a letter would be confirmation from the accountant that they made the tax return submission.
(2) BANK STATEMENTS lenders reserve the right to see evidence of self-employment cash flows. If your profits have taken a significant upward leap, for example, a lender may wish to reconcile this with cash flows present in your bank account/s.
(3) ACCOUNTANT’S COMFORT LETTER where an accountant is employed a lender, in certain circumstances, may ask for an accountant’s letter verifying the current health of the business and its current trading levels. A trading projection may also be requested.
IS IT ESSENTIAL TO HAVE AN ACCOUNTANT WHEN APPLYING FOR A MORTGAGE AS A SELF-EMPLOYED APPLICANT?
No. As above, lenders will typically use the latest 2 years of tax calculations and tax year overviews generated from a tax return you have submitted yourself. However, if your case is nuanced in certain ways, it can be beneficial to have income evidence supported by a qualified accountant.
CAN WE HELP YOU?
We can’t guarantee that we can help you, because each case has different wider circumstances, and lenders change their lending policies over time. However, if you are self-employed please do get in touch to see if we can assist with your goals. We have the expertise to increase your chance of mortgage success. We arrange mortgages for self-employed clients throughout the UK.
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