Self-Employed Mortgage with Decreasing Profits

Can I get a mortgage with decreasing profits?

Getting a mortgage when you’re self-employed can be difficult. Lenders want to ensure that your income is sustainable. They want to ensure that your current income is not only enough to cover repayments but that your self-employment is stable and reliable enough to maintain those payments over the loan’s duration – especially in the case of a long-term mortgage.

If convincing a mortgage lender that you’re a reliable borrower as a self-employed individual is difficult, it becomes even more challenging if your business is experiencing a temporary downturn and your profits have decreased. However, don’t lose hope as the good news is that getting a mortgage with decreasing profits can still be possible!

Here at The Mortgage Masters, we understand the challenges you may face and can support you in overcoming these challenges.

How will lenders assess my income when I have decreasing profits when I’m self-employed?

If you’re a sole trader, lenders will assess your income by looking at your profits. For company directors, lenders typically consider your salary and dividends. Some may also factor in a portion of the company’s net profits, potentially allowing you to borrow more than what is based solely on salary and dividends.

Some lenders will average out your profits from the last two years, whilst others average the last three years or even go off your most recent year.

However, if your profits have decreased, the lender will likely lower the average, which could affect the amount they’re willing to lend. A significant drop, such as 20%, may result in some lenders declining to offer a loan at all meaning your only available option is to approach a specialist lender. It therefore imperative that you seek advice from a self-employed specialist mortgage adviser if you have decreasing profits.

If I have decreasing profits, why may a lender still lend to me?

Whilst lenders want to ensure that your income is sustainable, most also understand that the nature of business is that there may be some fluctuations.

As a company director, you may have chosen to keep more profits within your business rather than withdraw dividends, even though your business maintained or increased its turnover. If this is your scenario, you can approach a lender who will base your affordability on retained profits rather than the amount you have withdrawn. Alternatively, you may have reduced profits due to investing in new equipment or having worked reduced hours due to starting a family.

From a lenders viewpoint, it is important for them to understand the reasons behind your declining profits and see whether or not it is just a temporary blip or whether your income is likely to continue to decline. An experienced adviser can work with you and your accountant to present your case to the lender. They will explain your situation to the lender to ensure they are confident that you can maintain your mortgage payments long term.

How much deposit do I need for a mortgage with decreasing profits?

The size of the deposit you’ll need depends on your personal situation and the level of risk the lender is willing to take. If you have a strong credit score and have been self-employed for several years, you may be able to secure a mortgage with a smaller deposit, as you can demonstrate a stable income.

While being self-employed doesn’t prevent you from accessing a 5% deposit mortgage, offering a larger deposit reduces the lender’s risk and increases your chances of approval. For instance, putting down a 15% deposit can likely give you access to better mortgage rates than if you only provide a 5% deposit.

If you have a very small fluctuation in profits, your need for a larger deposit is less than if your decrease in profits is more significant.

What evidence of income do I need to provide for a mortgage with decreasing profits?

When you’re self-employed, most lenders require you SA302 (tax calculations) and Tax Year Overviews from the last 2 years. If you are a company director, they may also request a copy of your accounts. Some lenders also request an accountant’s reference to ensure your income is sustainable.

Along with the usual paperwork required for a mortgage application, if you’re self-employed with declining profits, you may also need to provide the following documents:

• A business plan detailing your future financial projections • Proof of income from other sources, such as rental income or investments • A letter from your accountant or financial advisor supporting your application

How can I increase my chance of getting a mortgage with decreasing profits?

There are several steps you can take to improve your chances of securing a mortgage despite decreasing profits. These include:

• Working with a mortgage broker who specialises in helping applicants who are self-employed. • Use an accountant who to submit your returns. Ensure that they have a really good understanding of your business. • Consider making a larger deposit. • Maintain a strong credit score. • Obtain a letter of support from your accountant or financial advisor.

Here at The Mortgage Masters we know how to present your case to lender and know just which lenders to approach. Whether you’re dealing with a temporary setback or have experienced a prolonged decline in profits, our advisors are here to help guide you towards the best course of action. Your home may be repossessed if you do not keep up with repayments.