Last Updated on 24th July 2020
Getting a mortgage when you’re self-employed is often very different compared to an applicant that’s employed. It’s unlikely you’ll have payslips to prove your income, so how would you document your income to a lender? One method is by proving your income by showing your company’s net profit amount. In doing so, you’d then need to apply for a net profit mortgage.
There are many ways to prove your income when you’re self-employed. The method you choose will largely depend on the way your company or self-employment is arranged. Being your own boss can be great but it can make the mortgage process slightly more complex. Nonetheless, having an advisor on your side can simplify the entire mortgage process.
If you require a mortgage using your net profit as an income source, make an enquiry and an advisor will help you further. Our guide will also cover key areas for you to consider before applying for a mortgage.
What is a net profit mortgage?
A net profit mortgage is a home loan based on the amount of net profit you or your business has generated. Unfortunately, it’s difficult to get a mortgage based on gross profit. Nonetheless, net profit mortgages may be available to you whether you’re a director or a sole trader.
Lenders will calculate your affordability in their own unique way. As a result, you may be able to borrow more from one lender as opposed to another. Furthermore, some lenders will consider retained profits in a business, whereas other lenders won’t. This is why applying with the most suitable lender can increase your chances of approval, along with allowing you to borrow more.
Ultimately, your mortgage will be based on your declared net profits. This can sometimes be problematic as you can perhaps afford a lot more than your accounts show. This is why mortgages for the self-employed aren’t as straightforward as mortgages for those that are employed.
Will I qualify for a mortgage based on my net profit?
If you have your own business which produces a net profit each year, you should be able to apply for a net profit mortgage. Those that can apply will either be a:
- Company director
- Sole trader
Proving your income will be just part of your mortgage application. Lenders will also assess your credit score and other circumstances involving your financial and personal details. The length of time you’ve been trading will also play a part in how a lender will assess you. Having a sizeable deposit will also put you in a better position than having a smaller deposit.
If you’re employed and receive a salary from an employer, then it’s unlikely you’ll be able to apply for a net profit mortgage. This is because you’d receive payslips each month and not any profits from a business.
How much can I borrow for a net profit mortgage?
There are many factors which will impact the amount you’re able to borrow. Nonetheless, your net profit amount will perhaps be the most important factor in how much you can borrow. This is because lenders will use income multipliers as part of your affordability assessment.
Lenders will calculate your affordability by multiplying your annual net profit. Each lender varies, with some calculating your net profit by three times, whereas other lenders may multiply by five times. The differences in what each lender will lend can be quite staggering. This is why it’s important to approach the right lender, especially if you want to boost your borrowing potential.
Some lenders may use your latest net profit figures as an income multiplier. Other lenders may simply use your average net profit over the last three years if your accounts go back this far. If you require a larger than average mortgage, lenders may be more stringent in the paperwork you’re required to produce.
Being self-employed can sometimes bring a level of uncertainty around how your business will progress. Lenders may also share this same level of uncertainty. That being said, if you can show that you have future work secured in the form of contracts or other documents, it can certainly help your application. Furthermore, it may also incentivise lenders to offer you a higher mortgage amount.
Using net profit as a sole trader
Using your net profit towards a mortgage application will be slightly different if you’re a sole trader. For instance, lenders will typically assess your last three years’ worth of accounts. This can either be in the form of accounts or your self-assessment SA302 documents.
If your net profit has fluctuated quite considerably each year, lenders are likely to calculate an average over the last three years. If you’ve recently made a loss or invested heavily in your business, it can have a negative impact on your application. Certain lenders won’t lend if you’ve recently made a significantly lower amount when compared to previous years.
If it appears as though your business is growing it can work wonders. That being said, the opposite can cause lenders to question the strength of your business and whether you’ll be able to repay a mortgage.
The good news is that each lender is different and may only use your most recent income figures if they’ve increased. Furthermore, even if you’ve made a recent loss, lenders may allow for this, especially if you’ve reinvested funds back into your business. Some lenders may even allow you to apply with accounts for just one year.
Can a company director apply for a mortgage using net profit?
Applying for a mortgage as a company director is slightly different from how a sole trader would apply. This is because you’re likely to have a limited company. As a result, the way you withdraw your income will perhaps be in the form of dividends and an annual salary. Only some lenders will allow you to use the net profit in your company in addition to the income you’ve personally taken.
As a company director, it’s extremely important that you apply with a suitable lender. This is because certain lenders simply won’t allow you to use retained profits or net profits from your limited company. On the other hand, there are lenders that will consider the income you’ve withdrawn from the company along with the profits within the business itself. This can drastically improve the amount you’re able to borrow.
How to apply for a mortgage using net profit
Being self-employed can vary quite considerably for each borrower. You may even be employed but want to use the income from a part-time business or investments that you own. Either way, the majority of lenders will consider net profit when assessing your affordability.
With so many variables involved, if you did approach a lender that wasn’t suitable, you risk being declined. If you are approved, you may only be offered a small mortgage amount. In comparison, going to a lender that’s been handpicked by an advisor means you’re likely to be approved and offered the maximum loan amount possible.
If you want to apply for a mortgage and want to use your net profit towards your income, speak to an advisor who can help you further. We’ll assess your business and the number of years you’ve been trading. We’ll then assess the rest of your financial profile such as your credit history and the details of your purchase to ensure we only approach the most suitable lenders.
Using this method can save you a lot of money over your mortgage term. You can make an enquiry to speak to an advisor and check to see the type of mortgages you’ll be eligible for.