Historically, of course, brokers would have turned to a self-cert mortgage for their entrepreneurial clients, but since the disappearance of these products in 2009 the battleground for the self-employed has focused on the length of self-employment and number of months’ accounts required to demonstrate income.
However, trading period is just one consideration in the provision of suitable mortgages for the self-employed.
It is also important to think about how the borrower chooses to draw income from their business.
The majority of lenders base a self-employed income assessment on salary plus dividends, but changes to the way that dividends are taxed could mean this approach is less effective in demonstrating true affordability for a growing number of business owners.
At the Summer Budget 2015, the government announced the reformation of dividend taxation.
At the time there was a 10% Dividend Tax Credit in place, which meant basic rate taxpayers didn’t have any tax liability on dividends, while higher rate and additional rate tax payers paid effective rates of 25% and 30.56% respectively.
The changes meant that, from April 2016, the Dividend Tax Credit was replaced by a £5,000 dividend allowance and rates were increased by 7.5%, so basic rate taxpayers now pay 7.5%, higher rate taxpayers pay 32.5% and additional rate taxpayers pay 38.1%.
Following on, in April the £5,000 dividend allowance was cut to just £2,000, so dividend income is no longer as attractive for self-employed workers as it once was.
Savvy entrepreneurs are therefore likely to investigate other ways to legitimately draw income or, where they do not need the cash, choose to retain more profit within the business rather than pay higher levels of tax on dividends.
Work with lenders
This puts greater emphasis on working with lenders that are able to take a more holistic stance to how they assess the affordability of a self-employed applicant.
A lender that bases its decisions on the latest year’s figures but only takes salary plus dividends, for example, may not be able to lend as much as lender that asks to see a longer trading history but can also consider net operating profit.
The key is to work with lenders that can take a common-sense approach to underwriting and have the criteria and flexibility to understand a self-employed applicant’s true earnings, even if tax changes have encouraged them to limit their drawn income.