How IMC Mortgage Brokers Can Help You
Many mortgage lenders who lend to the self-employed base their income assessment and affordability calculations on multiple years’ accounts – typically three years or, for some, two years. Approaches vary, but it is usual for lenders to take an average of your income over the past two or three years, and use that figure as the base income on which to base their affordability assessments and work out how much you can borrow. There are, however, scenarios in which you might need or want a lender to base their assessments on just your last year’s accounts.
Getting a mortgage with one year's accounts
The good news is that there are lenders who are willing to base their mortgage underwriting assessments on just one year’s accounts. With more and more people becoming self-employed each year, a number of lenders have realised the need for these people to be accommodated by the mortgage market. There are three main scenarios where you might want or need to get a mortgage with one year’s accounts.
- You have not been trading long enough to have more than one year’s accounts.
There are lenders who are willing to lend to self-employed people with only one year’s accounts in these circumstances. In certain cases, specialist lenders may even be able to lend if you have not been trading long enough to cover a full tax year, basing their lending decision instead on a “rolling year” of business accounts.
- You have changed trading style and only have one year’s accounts under the new trading structure.
If you have, for example, moved from being a freelancer to setting up a limited company, or significantly changed the nature of your business and only have one year’s accounts under the current structure.
- You have increased profits showing in your last year’s accounts, and want to base your mortgage lending on the higher amount.
The maximum amount you can borrow can vary significantly depending on how the lender assesses your income, and over what period. See below for an illustration of the difference this can make.
Mortgage lending based on increased profits
Let’s look at a scenario where your business is performing well, and the profits in your last accounting year are higher by a considerable margin than in the previous years:
| Tax Year | Profit |
|---|---|
| 2014-15 | £30,000 |
| 2015-16 | £35,000 |
| 2016-17 | £49,000 |
Many lenders will ask for your last three years’ worth of self-employed accounts, and calculate the average as your base income. In this case, that would be:
(£30,000 + £35,000 + £49,000) ÷ 3 = £38,000
If we assume the lender applies a basic income multiple of 4.5 to determine the maximum you can borrow, this would be:
£38,000 x 4.5 = £171,000
However, if a lender is able to base its borrowing calculation on the last year’s accounts alone, this would give:
£49,000 x 4.5 = £220,500
As you can see, the difference between being able to borrow £171,000 and £220,500 is not insignificant. Both are based on your actual income figures, but a simple variance in lending criteria can make a massive difference to the home you could possibly afford to buy.
How we can help
Mortgage lenders can vary considerably in how they assess mortgage applications from self-employed applicants, and for those who have incorporated their business as a limited company, navigating the mortgage market can be even more complicated. Regardless of how you have structured your business, contact us today to find a lender who can calculate your potential borrowing based on just one year’s accounts.
