Self-employed people are always trying to be as tax efficient as possible, but this can be a detriment when applying for a mortgage. This blog aims to explain the steps self-employed people should take as a small business owner, freelancer, or contractor to give themselves the greatest chance of getting the best possible mortgage loan.

Positioning the business

Most accountants help clients position things so that the business – and/or the individual – minimises their tax outgoings. However, keeping more cash in the business (rather than drawing it as salary and dividends) could end up making self-employed people look less well off than might be the case. This could mean that even though accountants know the self-employed person can afford to repay the loan they are seeking, their personal income figures do not support this assertion.

Let us say they are earning £50,000 p.a. from their business, when equating the value of what mortgage loan they can have, their earnings might be only half of what they are, due to tax savings.  This means losing out on a more favourable mortgage loan amount.

Self-employed mortgage applicants must be sure to explain to their accountant that they are looking for a mortgage deal and tell them how much they hope to borrow. Together with their mortgage adviser, they will be able to advise as to whether it would be to their advantage to take more profit out as a dividend, so their personal income is boosted. This might mean having to pay more income tax in the short term to get a better mortgage deal. It is important to be aware that some lenders do take retained profits into account when looking at affordability –  mortgage advisers are likely to be able to advise on this – and accountants/financial advisers will be able to structure things accordingly.

Keep your business and personal spending separate

It is a good idea for self-employed people to keep business and personal spending separate. If there is a habit of putting business expenses on a personal credit card and paying the bill via the business account once a month, this should be reconsidered. To a mortgage lender looking at bank statements, that will look like personal spending and may have a detrimental effect on borrowing ability. Again, an accountant will be able to help see where potential pitfalls lie. Remember that a check will be run on the business address, too, so it is advisable to make sure all payments are up to date.

For any self-employed person planning to apply for a mortgage, they need to show a minimum of 2 years of accounts.  Halifax is the only lender that might look at just one year. Whilst having to show a minimum of two years’ worth of accounts can seem like a chore, if they are prepared and they show an upward trend, the more the better.

Key things to consider when looking for a mortgage

While there are various things to consider when looking for a mortgage, getting finances in order first, with the help of an accountant, financial adviser and a mortgage adviser, can make a huge difference to your borrowing capacity. It makes it easier for lenders to be able to assess a mortgage applicant’s financial situation.

At Beaufort Mortgages, we find the best mortgage rates for First Time Buyers, Home Movers, those looking to Remortgage and landlords requiring Buy To Let mortgages. Get in touch with Dan Godfrey, our independent mortgage adviser.