By Christian Tomaszewski for

With the anticipation of multiple interest rate rises predicted by many over the next 18 months, in response to spiralling inflation, the conversation of mortgages and specifically longer-term mortgage rates have been universal.
Applying for a residential mortgage as an employed individual can be rather simple – three months’ worth of bank statements, three payslips and the intern behind the Perspex glass at the local bank branch will be able to assess what your lending capacity is.

However, when self-employed the mortgage application process is simply not that straight forward. Whether you are a sole trader or a director of your own limited company, the requirements are extensive and there is plenty of pre-planning that can be done when applying for a residential mortgage.

The main difference is that lenders will generally ask for two years’ worth of accounts and take an average over this period. And as we are now in November 2021, lenders will ask to see April 2021 accounts.

Beware lenders will reduce your lending capacity if the following are applicable:

Outstanding car loans
Childcare costs
Nursery/school fees

Limited Company
This structure can provide you with the most amount of flexibility. Lenders are willing to use a mixture of PAYE salary, dividends and profit.

In regard to the profit within the company, lenders can use this figure in their calculations as they understand you will not draw income you do not require. Beware that if you are less than a 25% shareholder, this may not be possible.
Over the past two to five years private landlords have been incorporating their properties, moving them from their personal name into a limited company, mostly for a tax-saving purpose. Beware the income assessed by lenders from these investment properties will be net of all costs including mortgage payments.

If you have been offered a fixed PAYE contract, lenders will entertain to use this fixed contract income, with the assumption it will be maintained over the longer term.

Sole trader
Generally, anyone who earns as a sole trader, will put as many costs allowable through the company, as it reduces the income tax bill at the end of the year.

Beware, lenders will assess your lending capacity based on your net profit, after costs have been deducted from your total turnover. This is generally where sole traders full short, as they attempt to reduce their net profit figure. This is where pre planning with an accountant needs to be encouraged especially when the sole trader understands what mortgage they may need to achieve.

I’m getting to the end of my mortgage term… what do I do as I’m retired?

It is not rare for people to reach the end of their mortgage, at age 65, with still a small mortgage remaining but wanting to stay in the same property. Although someone in this position may have the savings to pay off the mortgage, it may not be preferential, especially if immediate cash flow is an issue.

Lenders are now considering residential mortgages until age 70 or 80 and although you may be retired, and therefore have no earned income, you may well have a pension. Whether or not the pension is currently paying out an income, lenders will use this income in assessing your mortgage capacity.

Planning ahead
When applying for a mortgage, and if you are to use a mortgage broker or financial adviser, it is essential to lay everything out on the table. Whether that be your credit card debt or information which you deem irrelevant, it very well may make a material difference. Lenders do significant due diligence and it will save you money and time.

On the flip side there may be different avenues and lenders which advisers and brokers can use depending on your circumstance. Certain lenders are known for specialising in specific areas, whether that be utilising profit calculations, trust income or pension income.

Christian Tomaszewski is a financial advisor at Timothy James & Partners Ltd