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What lenders want, how accountants can help

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19th Jan 2017
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Carl Shave outlines the difficulties many self-employed workers have securing a mortgage, and explores what steps their accountants can take to assist them.

For people who are self-employed – whether contractors, freelancers, sole traders or company directors – getting a mortgage can involve jumping through more hoops than an employed, PAYE applicant. The irony of this is that business owners who employ people can end up in the odd position that, while their employees can usually get a mortgage with little difficulty, they themselves cannot.

Sometimes focus is on one particular aspect of a client’s business – positioning things so their tax exposure is minimised. In the majority of cases this is absolutely the right thing to do, but there is one instance when structuring things differently might lead to a better outcome for the client, and that’s when they are looking to secure a mortgage.

Income

Different lenders take into account different things when it comes to evaluating income – most significantly, not all lenders will take account of retained profits. From an accountancy point of view, encouraging a client trading as a limited company to draw a small salary and take the rest of their income in dividends – or else leave profit in the business rather than take it out – is often good practice in terms of minimising tax liabilities.

However, that can work against someone looking for a mortgage as it may appear that their “income” is lower that it is, and therefore actually reduce the amount they can borrow.

When it comes to what a lender looks for with regard to proof of income, one size unfortunately does not fit all. Some will accept one year’s accounts, others will want three years’.

In some cases an SA302 year-end tax calculation is sufficient, in others full accounts are required and, in most cases, accounts need to be certified by an acceptable qualified accountant. Added to this is the recent suggestions that the Self-Employed could be being penalised, in effect, by the high-street.

But what’s best for the client?

Sole traders/Partnerships

Because for a sole trader or those in partnerships all income is personal income, an SA302 is often the best way to verify this. The business year is in most cases the same as the tax year and, providing the tax return is submitted soon after the tax year end rather than leaving it until the end of the following January, there is little lag.

There are some circumstances in which the SA302 might not be so useful. For example, if a loss was made in the previous year it could be offset against the profit earned in the current year, and so the taxable amount of income shown wouldn’t reflect actual income earned.

Limited company directors

Limited company directors, especially if they are taking a small salary to minimise tax, may find that the SA302 is not their best option as it could possibly not represent their true income. Any share of the retained profits, which in some cases may represent the bulk of the client’s income, might not be taken into account by a lender, which could reduce borrowing capability.

If you have recommended that for tax purposes profit is kept within the business rather than distributed as dividends, then again the SA302 will not give the full picture. However, an accountant’s certificate – which shows a picture the SA302 cannot, by taking into account salary income, dividend income and company profit – will be accepted by some lenders as evidence of income.

Limited company directors may also be asked to provide past years’ accounts – usually between two to three years’ worth but sometimes just the most recent. In certain circumstances – for example, if a client is having a good year – you may be able to help them boost their borrowing potential based on as yet incomplete accounts for the current year’s trading. Again, an accountant’s certificate will be required.

Be informed

It takes to time to reposition a business, so do encourage your clients to keep you informed about their finances and needs especially any future mortgage plans. That way you can be sure that you do everything you can to help them achieve the outcome they want. The fact they may end up paying a little more income tax for a couple of years can potentially be offset by helping them get a better mortgage deal and – best of all – making it possible for them to move into their dream home.

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