Self-Employment, re-investing & restricted mortgage options?
Some business owners regularly re-invest in their companies in order for them to keep growing. In periods of growth, they don’t always pay themselves as much as they should, holding them back from getting a mortgage.
For these types of Self-Employed applicants, there is Self-Employed Mortgage Advice in Birmingham available if they feel the following case study illustrates them.
Minimal Expenditure Shouldn’t Mean Minimal Borrowing
Neil was an HGV driver who had been redundant and decided to start his own business in the crafting industry of all things, having spotted a gap in the market. He sold the family home and moved into his in-laws with his wife and children to set up from their garage.
He used the redundancy money and house sale proceeds to buy some stock and set off on his journey into self-employment. Things went well, and within a couple of years, the business was making a small profit.
Neil and his family cut their cloth accordingly and aggressively minimized their expenditure to allow the business to grow more quickly. Luckily they had no rent or mortgage to pay each month, and Neil only paid himself a minimal salary in line with the annual tax-free allowance.
Fast forward 3 or 4 years and the business now had premises and was making almost £100,000 net profit. Still, with minimal expenditure, Neil continued not to pay himself properly. It was time for the family to buy a new home, but his Bank would only lend him £40,000 for a mortgage, and he approached us for assistance.
Affordability is Much More than Just a Salary
Neil’s Bank had let him down because he was only paying himself around £10,000, and despite the profits, in the business, he and his family could just about live without a dividend from his Limited company.
Unfortunately, most High Street Lenders (with the odd exception) only assess affordability based on declared earnings. This usually is salary + dividends averaged over 2 years, but in Neil’s case, salary alone.
Retained Profit can be just as Important
We managed to find a Lender who would assess Neil’s profits in a completely different way. The Lender took into account his “retained profits” and did not penalize him for his self-imposed frugal lifestyle.
This Lender was not interested in the fact Neil was not drawing out a dividend he did not need from his Limited company and agreed to lend him up to £400,000 (Neil did not need this much as he borrowed a much lower amount).
A low Salary Versus Difficult Lenders
Neil was not a self-employed applicant looking to take out a self-employed mortgage in Birmingham while simultaneously seeking to minimize the amount of tax he paid aggressively. He made personal sacrifices in terms of income to grow a business from scratch.
He felt that his Bank was not interested in hearing the whole story about his company’s growth and took a blinkered view of his financial situation based on income declared to the Inland Revenue.
We found him a Lender who took a much more understanding view and Neil and his family are now back where they belong in a family home of their own.
We’ll try to Help you on all Account
If you are in a similar position to Neil or a self-employed applicant looking to take out a self-employed mortgage in the future or needing Self-Employed Mortgage Advice in Birmingham, please contact us. Sometimes there needs to be much forwarding planning to take out a self-employed mortgage, and we are happy to help with this.
I Had a client some years ago who had sold his house and moved back into the family home to start up his business. They made lots of sacrifices personally to grow their business, and within a few years, it was starting to show good profits. He kept his expenditure down to the bare bones and kept re-investing in his Limited company.
He had a sound business with a six-figure profit but hardly any declared income because of his self-inflicted lifestyle choice. Surely this is the kind of frugal businessman all Lenders should be considering (low LTV case too)?
Date Last Edited: December 6, 2023
