In the quest for homeownership, securing a mortgage can be a daunting task, particularly for self-employed individuals. One vital aspect often overlooked is how undrawn profits from a company can be utilised as income for mortgage purposes.
Understanding Shareholding Thresholds
The shareholding threshold significantly influences how lenders categorise self-employed applicants. Generally, applicants who possess more than 25% of a company’s shares are considered self-employed for mortgage eligibility. Nonetheless, this threshold can vary among different lenders.
If an applicant’s shareholding is below this threshold, they are classified as employed. Consequently, for affordability calculations, most lenders consider only the director’s salary. While some lenders may include dividend income, excluding both dividend income and net profit share can substantially affect borrowing capacity.
We have access to at least one lender who can offer mortgages based on salary and fractional shareholding, without any minimum shareholding required to utilise the share of net profit.
For joint applicants, it’s essential to note that shareholdings can be aggregated. If both applicants hold shares in the same business, lenders may combine their shareholdings to determine mortgage eligibility.
Essential Documentation
To substantiate their income, self-employed applicants need to provide tax calculations and tax year overviews. The tax calculation details total income, referencing both salary and dividends drawn in the tax year. If a share of net profit is required, lenders may also request company accounts or an accountant’s certificate.
Retained Earnings and Tax Efficiency
Many self-employed individuals retain money within the company for tax efficiency or because, while they post a profit, the cash isn’t available to draw from the company. Some lenders are less concerned with the ability to draw on profits and are comfortable basing lending affordability on theoretical drawings.
Specialist Lenders and Brokers
High street lenders often do not consider net profits as proof of income. Therefore, engaging a mortgage broker is crucial to finding a specialist lender who will accommodate self-employed applicants.
Conclusion
Understanding the nuances of how shares can be used as income for a mortgage is pivotal for self-employed individuals. By strategically navigating shareholdings, leveraging dividend income, and consulting with specialist lenders, self-employed applicants can enhance their chances of securing a favourable mortgage deal and achieving their homeownership dreams.