Moving home can involve coordinating a sale, purchase, mortgage, valuation, survey and legal work at the same time.

For a self-employed applicant, there is another important task: demonstrating that the income supporting the new mortgage is sustainable.

Being self-employed does not automatically make obtaining a mortgage more difficult. The challenge is that lenders assess self-employed income in different ways and may require more evidence than they would from a salaried employee.

A borrower should establish a realistic mortgage budget before marketing the current home or making offers on another property.

How will the lender calculate income?

The answer can depend on the applicant’s business structure.

A sole trader may be assessed using taxable profits shown in the accounts and tax calculations. A partner could be assessed on their share of the partnership’s profits.

For a limited-company director, a lender may consider salary and dividends. Some lenders may also consider a share of retained company profit where the applicant owns a sufficient proportion of the business, but this approach is not universally available.

This creates an important distinction between business turnover and personal income.

A company may receive substantial revenue without generating an equivalent profit. Equally, a director may leave profit within a healthy business rather than withdrawing it as dividends. Different lenders can reach different affordability figures from the same accounts.

Trading history affects the options

Many lenders prefer applicants to have a track record supported by two or more years of accounts and tax information. Some may consider a shorter period where the applicant has suitable experience, strong recent results or has moved from employment into the same industry.

The lender may examine:

• How long the business has traded
• The applicant’s ownership share
• Recent turnover and profit
• Salary and dividend history
• Retained profits
• Whether income is rising, stable or falling
• Current business performance
• The sustainability of future earnings
• Existing business and personal borrowing

A newly incorporated business can require careful presentation, particularly where the applicant previously operated as a sole trader. Although the underlying work may be unchanged, the legal structure and way income is reported are different.

A strong current year may not solve everything

A self-employed applicant may have an excellent current year but weaker figures in the completed accounts.

Some lenders average income across recent years. Others may use the latest year where profits are increasing or take a more cautious view where income has fallen.

Management accounts, an accountant’s projection or recent business bank statements may help explain current performance, but they do not guarantee that a lender will disregard the completed figures.

If the latest accounts show a significant increase or decrease, be prepared to explain why. A change could result from a new contract, investment in equipment, loss of a customer, exceptional expenditure or a deliberate change in working hours.

The explanation should be accurate and supported by evidence.

Prepare the documents early

The documents required will depend on the lender and business structure, but a self-employed home mover may need:

• Finalised business accounts
• SA302 tax calculations
• Tax-year overviews
• Personal bank statements
• Business bank statements
• Proof of identification and address
• Details of personal loans and credit cards
• Evidence of deposit funds
• The current mortgage statement
• Evidence of other income
• Details of ongoing financial commitments

The figures supplied on the application must be consistent with the accounts, tax documents and bank statements.

HMRC documents should be downloaded early rather than requested after an offer has been accepted. The accountant may also need time to finalise the latest accounts or explain a significant change in performance.

Understand the equity in the current home

The expected sale price is not the same as the deposit available for the next purchase.

Begin with a realistic property valuation, then deduct:

• The existing mortgage balance
• Any early repayment charge
• Estate-agent fees
• Legal costs
• Removal expenses
• Any secured borrowing
• Other sale-related costs

The remaining figure provides a more realistic estimate of the equity available for the next purchase.

The buyer must also budget for the property transaction tax applicable in England, Wales, Scotland or Northern Ireland, together with valuation, survey, mortgage and conveyancing costs.

Using every available pound as the deposit can leave insufficient money for moving costs, repairs and emergencies after completion.

Can the existing mortgage be moved?

Some mortgages are portable, meaning the existing product may potentially be transferred to a new property.

Portability is not automatic approval.

The lender will normally assess the new application, income, expenditure, credit position and property. The borrower must meet the lender’s current criteria, even if every payment on the existing mortgage has been maintained.

If additional borrowing is required, that amount may be placed on a separate product with a different rate and expiry date.

Alternatives could include repaying the current mortgage and arranging a completely new one. The comparison should include early repayment charges, product fees, affordability, interest rates and the intended length of time in the new home.

Avoid disruptive financial changes before applying

Self-employed borrowers should consider the mortgage implications before making major changes to the business or personal finances.

These could include:

• Changing from sole trader to limited company
• Reducing salary or dividends
• Taking substantial new business borrowing
• Financing a vehicle or expensive equipment
• Drawing a large sum from the company
• Changing ownership or directorship arrangements
• Taking extended time away from the business
• Missing tax or credit payments

This does not mean commercial decisions should be made solely for a mortgage application. It means the timing and consequences should be discussed with the appropriate mortgage, accounting and tax professionals.

Do not increase drawings or alter accounts merely to create a more attractive mortgage figure.

Obtain an assessment before committing

A decision in principle can provide a useful indication of potential borrowing, but it is not a mortgage offer. The final decision remains subject to the complete application, supporting documents, credit checks, valuation and underwriting.

Before marketing the existing home or making serious offers, a self-employed home mover should understand:

1. Which income figures lenders are likely to use.
2. How much equity may be available after selling costs.
3. Whether the current mortgage can be ported.
4. What early repayment charges may apply.
5. The likely monthly payment on the new mortgage.
6. Which documents must be prepared.

NetRent Mortgage Solutions can help self-employed home movers review their income evidence, existing mortgage and likely borrowing options before the moving process gathers pace.

To discuss your plans, contact NetRent:

Telephone: 01352 721300
Email: mortgages@netrent.co.uk

NetRent does not provide legal, tax or accounting advice. This article represents our general understanding of the mortgage market and is provided for information only.

Mortgage products, rates, fees, affordability calculations and lender criteria can change. Appropriate mortgage, financial, legal, tax and accounting advice should be obtained before proceeding.

Your home may be repossessed if you do not keep up repayments on your mortgage.