Getting A Self-Employed Mortgage Using Net Profits

In this article, we’ll explain how affordability assessments for self-employed applicants are completed, what a net profit mortgage is, and why finding the right broker is your best route to the right deal.

What is a net profit mortgage?

A net profit mortgage is no different than a standard mortgage – the only difference being the way the amount you can borrow would be calculated using the net profits from your business rather than being based on a regular salary or other type of income source.

Are self-employed mortgages calculated using gross or net profits?

Both gross and net profit mortgages are available if you’re self-employed, although a gross profit mortgage is not easy to find.

Each lender has their own method of calculating self-employed profits. Successful applications are a result of working out whether net or gross profits are your best route to the loan you need, and then finding the right mortgage provider to suit your requirements.

Most borrowers will have affordability assessed on net profits.

Who can be eligible for a mortgage based on net profit?

Basically, anyone who earns income from a business they either own outright or a share of that generates profit can use this ‘net’ figure as a basis to apply for a mortgage. So, this includes: 

• Sole traders
• Partnerships
• Directors of limited companies

How is affordability calculated?

Net profits are calculated differently depending on the nature of your self-employment, and the amount you can evidence will have a direct impact on your affordability.

Net profit mortgages for sole traders and partners

Calculating your net profit as a sole trader simply requires you to total up all receipts for the year and then deduct your business expenses.

So, if you’re looking to invest heavily in your business but plan to apply for a mortgage in the next couple of years, you should get professional advice before going ahead.

For partners

Anyone with at least a 25% interest in a partnership may also be eligible for a net profit mortgage. As a partner, your net profit will be calculated in much the same way as it is for sole traders. However, some lenders will only approve a loan if all partners are signatories.

The evidence required for sole traders is similar and, once again, varies between lenders.

For company directors

Most mortgage providers will use your salary and dividends as your entire income.

However, there are lenders who allow company directors to use net profits from their business, or retained profits, to count towards income when assessing affordability.

How much can you borrow?

Once you have calculated your net profit for the past two years (or projected profit for the current year) you can use our self-employed mortgage calculator to get an idea of how much you might be able to borrow.

Most lenders will allow you to borrow up to four and a half times your income, but there are some that limit it to three times and others that go as high as five. Higher-income multiples are available in certain situations, but this is rare.

How much deposit will you need?

The deposit requirements for a mortgage won’t change purely based on your income source. So, the minimum deposit of between 5%-10% would apply as in most cases. But, because only a small pool of lenders will consider applications based on net profits then the terms available are restricted by what those lenders expect in terms of minimum deposit levels. 

Any applicant with a deposit in excess of 20%-25% will have a larger number of mortgage lenders available.

What evidence of income is required?

Usually, you will need at least two years of accounts. It’s not impossible to get a mortgage if you have been trading for less than this, but it will restrict the number of providers and products you can access.

In most cases, affordability is assessed using an average of the two years accounts.

If your most recent years’ income is higher than the average:

• Some lenders will use that figure
• Others will use the lower of the two
• There are also lenders who assess affordability purely on your most recent accounts

Certified accounts are preferred by some mortgage providers, but there are plenty who will accept tax returns (SA302s) along with recent bank statements (usually three months’ worth).

Established sole traders with steadily increasing profits are often viewed as lower risk than startups or those with fluctuating or falling income. Relatively new sole traders who are performing strongly and can supply a detailed business plan can borrow using profit projections with some providers.

If your income has dropped by 20% or more in the last year, your choice of lenders will be further restricted.

How a broker can help you get a net profit mortgage

Net profit mortgages are a specialist type of home loan and the way that lenders assess eligibility and affordability varies massively. While your circumstances may see you rejected by several lenders, others will approve your loan. And even then, the amount you can borrow or the rate you pay can differ significantly.

So, your route to the deal that best matches your circumstances is to speak to a broker who specialises in this type of mortgage and has a network of industry contacts.

Their knowledge of the market will make sure you approach the right lender first time, saving you time and avoiding the frustration of going it alone and facing multiple rejections.

Which lenders offer this type of loan?

The good news is that most UK lenders will approve a loan based on net profits for self-employed.

This includes major high street banks such as:

• Natwest
• Santander
• Halifax

With that said, in many cases, you will get a better deal with a specialist lender that operates solely in this type of lending.

Often, the challenge is not in finding a lender who offers net profit mortgages but in finding the one that best suits your situation. The closer you’re aligned to a lender’s risk profile, the more likely you are to be accepted, and the better the rate they will usually offer you.

Eligibility criteria

Aside from income calculations and multiples, many lenders apply specific eligibility criteria to net profit mortgages.

These can include:

• Maximum loan amount – the cap they apply may vary
• Assets must outweigh liabilities for each of the last two years
• Some lenders will ask to see evidence of upcoming work

The bigger the mortgage, the more likely a lender is to delve deeper into your finances

You will also need to meet the lenders standard eligibility criteria for:

• Loan to value
• Credit history
• Age
• Profession
• Property type

You can find the full eligibility criteria in our comprehensive article on self-employed mortgages.