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Why are banks using Net profit before tax ?

Use of Net and Gross Profit figures for Mortgage applications

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Hello - I want to re-mortgage and Santander are saying they only look at the Net profit before tax figures (the lowest one), not the Gross Profit figure - this seems quite remarkable to me. I appreciate this is not technically an accounting question but I'm desperate for an answer. 

Many thanks



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By lionofludesch
24th Mar 2018 09:57

Just guessing but is it because, if you spend money on expenses, you won't have it to spend on paying the mortgage ?

Mind you, you could say that about the tax too, so it's probably not that.

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Tom McClelland
By TomMcClelland
24th Mar 2018 10:00

NPBT gives them a reasonably consistent baseline. Same as wages before tax. Gross profit doesn't allow for meaningful comparison between different businesses because in some businesses NPBT might be 10% of GP while in others NPBT might be 90% of GP.

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By andy.partridge
24th Mar 2018 10:08

Net profit before tax is not 'the lowest one'. If you look you'll see that profit after tax is lower. Ask yourself the question why they don't go by your sales figure. If you know the answer to that you are half-way there.

Why are you desperate for an answer? Relax a bit. You'll live longer.

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By Chris.Mann
24th Mar 2018 11:06

You don't say mention the legal status of your business? Let's assume you're self-employed.

Presumably, your financial reports (accounts) include;-
Sales, or business turnover
Cost of sales (and, the difference between these two figures, will equal your gross profit)
Expenses, could be classed as; direct, administrative, or simply general overheads.
The difference, between the gross profit and, the general overheads, will provide the net profit, or net loss.
The net profit, or net loss, will form the basis (in very basic terms) of your self-assessment tax calculation (SA302).
Santander will, no doubt and, in due course, want to see your SA302 tax calculation (and HMRC tax overview) to determine whether they can provide you with mortgage facilities.
Therefore, traditionally, the net profit is always the basis of mortgage/loan applications. It's as simple as that.
Finally, if you're looking at re-mortgaging, how did you manage to obtain the original mortgage? Presumably, you provided your net profit figure?
Desperate, on a Saturday morning?

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By Manchester_man
25th Mar 2018 02:17

To the original poster
It would be utterly nonsensical to use any figure other than net profit!

Example - say my business is as follows:

Turnover / sales - 100,000

Less: Cost of sales - 50,000

Gross profit - 50,000

Less: Overheads & admin / staff costs - 30,000

Net profit before tax = 20,000

I want a mortgage. The bank wants to know what my income is (perfectly reasonable question considering they are considering lending money).

Is *my 'income' 50k or is it 20k ?

(The answer is NOT 50k)

*Assuming not a ltd co

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Replying to Manchester_man:
By lionofludesch
25th Mar 2018 08:00

My profit is £25000. I pay tax of £5000.

How much do I have available to pay the mortgage ?

£25000 or £20000 ?

How much do I have available if the tax rate doubles overnight after a General Election ?

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Replying to lionofludesch:
By WhichTyler
26th Mar 2018 09:35

While you do pay the mortgage out of taxed income, don't lenders usually consider gross salary multiples when working out how much to lend? Which would correspond to NPBT for a sole trader...

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By blox
25th Mar 2018 12:17

It does make a difference if the OP is a Ltd Company and he is remunerated also as a director.
In this case the issue is that Net profit before tax does not take into account directors' salary whereas Gross Profit does.

Turnover £100,000
Cost of sales £30,000
= GROSS PROFIT £70,000
Administrative expenses
- director salary £20,000
- other expenses £10,000

However, because of the director salary there should be £20,000 more in the assesment pot (£60,000) but still not as much as Gross profit (£70,000).

Perhaps they get £20,000 figure from Self Assesment and add these on before forming their decision on what the person earns....

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Replying to blox:
By atleastisoundknowledgable...
26th Mar 2018 08:10

“Net profit before tax does not take into account directors' salary whereas Gross Profit does.”

Not necessarily, depends what the director(s) do for their salary.

I’ve manufacturing clients with 50% directors salary in CoS, 50% in o/heads. 1 director makes stuff, so CoS, 1 runs the company, so o/h.

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