The Chancellor may not be penalising self-employed late tax returns, but the mortgage market might…
From our experience, self-employed clients generally expect to have a hard time acquiring mortgage finance, but this is not normally the case.
Income-checking methods such as using salary and dividends or share of net profit can be used, which can provide different results, therefore maximising affordability for a particular client with a certain lender.
Certain lenders may also work off last year’s figures or an average of the last 2-3 years’ figures.
This may be provided via self-assessment tax calculations or company accounts.
Again, we can check to see which provides the more suitable results for a particular lender.
So what’s changed?
At present, the most up-to-date proof of income for self-employed clients tends to be the 2020 tax calculation.
However, this shows income earned before the pandemic, and as so much has happened since this date, it’s difficult to get a good indication of current earnings and how the pandemic may have affected the business.
In the wake of the coronavirus pandemic, additional questions about how COVID may have affected the business can help, and lenders are more frequently asking to see business bank statements to back up residential lending applications.
Figures are not set in stone, though, and unless lenders have HMRC confirmed proof of income, they cannot base a lending decision on it.
How has the market reacted?
We have started to see lenders restrict their maximum loan-to-value lending for the self-employed.
This includes sole traders, limited company directors, and partners in firms – essentially, anyone who submits a tax return for their income.
Santander, for example, has limited the maximum they will lend to 60%, TSB has limited lending to 75% and Nationwide is at 85% loan-to-value whilst other lenders are restricting their income multiples for the self-employed.
As an example, Halifax now limits lending at 4.49 times income for anyone with an element of self-employed income.
There are still options for borrowing up to 90% for the self-employed, so don’t despair, just have your necessary information available.
Ideally, two years of tax calculations and corresponding tax year overviews, two years of accounts, a projection or management accounts for the current year and six months of business bank statements.
We will need to ask questions about COVID and how it has impacted your business, such as:
- Have your staff been furloughed?
- If you are a sole trader, have you taken the SEISS government grant?
- If yes, did you use the grant, or is it still in the bank?
- What is your plan for the business in 2021?
- Can the business survive future potential lockdowns?
With this detail we can build a proposal for the lender and present the application in the correct manner.
Lenders are still lending to self-employed clients, but the self-employed are under much greater scrutiny, and using a broker is almost a necessity in the current lending climate.