Mortgages Using Retained Profits
Successfully running a business requires your undivided attention, sometimes making it impossible for you to start thinking about getting a mortgage. Not to mention, weighing up the specific options that are available to you.
However, when you do get round to the latter, you’ll quickly find that the process has some inherent complications. This primarily owes to the fact that you’re classed as being self-employed. Consequently, it’s generally the case that you won’t have any payslips in order to prove your income, i.e., one of the main prerequisites in applying for a standard mortgage loan. And so, naturally, the intrinsic procedures make the necessary approach relatively varied. Having said this, there is a particular route you can take which would see you comfortably secure a loan using the net profits from your organisation. These mortgage types are known as mortgages using retained profits.
As with all mortgages, finding the deal that’s right for you is singularly tricky, you have to make a thorough assessment of your individual situation and personal finances before coming to a solid conclusion. But, on top of this, the standout difficulties become intensified when you’re leading a business venture. You must be very selective about which lenders you apply to, given that not all are suited to meet your needs. It’s for this reason why we strongly suggest hiring an expert mortgage broker to help guide you through every step of the journey. Here at The Mortgage Genie we have assisted a great number of our clients by getting a mortgage using retained profits for them. If you’ve got a decided interest in joining the many among our success stories, then be sure to reach us by calling 01915809890 today.
Regardless of the service that we can provide for you, it remains well worth coming to terms with everything you should know concerning mortgages using retained profits. So that you can fully inform yourself on the subject, we’ve put together this piece which covers all the salient details while answering the burning questions. We will go over:
- What is a mortgage using retained profits
- Can I get a mortgage using retained profits?
- Am I eligible for a mortgage using retained profits?
- How much can I borrow for a mortgage using retained profits?
- What deposit do I need for a mortgage using retained profits?
- How to apply for a mortgage using retained profits
What is a mortgage using retained profits?
As per the name, a mortgage using retained profits is one where you leverage a business’ generated net income that is kept within its accounts, rather than being withdrawn to pay out to shareholders, in order to secure a mortgage loan. In this instance, your mortgage will, followingly, be reviewed based on those net profits which have been declared by the organisation. Evidently, this is where complexities are liable to arise, given that it’s possible for you to afford a lot more than your accounts appear to show on the surface.
To give an example, let’s say that your business had retained profits averaging at £125,000 over the previous 3 tax years. Subsequently, apply to this the general rule that lenders are typically willing to offer a loan of up to 4x one’s overall income. This would mean that you’d be able to borrow a total mortgage amount of £500,000. On the other hand, there are some lenders out there who allow you to use the highest profit figure over those last 3 tax years. So, if you had a particularly lucrative year and accrued £200,000 in profit, this would enable you to take out a mortgage loan of around £800,000. Of course, this is a rather distinct case, and it’s important to bear in mind that every lender is different. I.e., some mortgage providers will look at your recent tax returns, while others may only want to look at the value of your net profit from the single previous tax year. Further still, it’s possible for certain lenders to even multiply your profit figure by more than 4, but likewise less too. The crux is finding the correct provider for you.
Can I get a mortgage using retained profits?
The short answer is yes, getting a mortgage using retained profits from your business is an entirely legitimate way of securing a mortgage deal. In fact, if you have a vast degree of profit that you haven’t yet used, and you’re seeking a way of investing your finances shrewdly, then a property can represent an ideal solution.
Beforehand, however, you should be certain that you qualify as an individual who can use your net profits for a mortgage because self-employment entails a wide range of titles. In essence, you have the ability to apply for a mortgage using retained profits if you’re either a business owner, a company director, a sole trader, a freelancer, or a landlord. If you’re in a shared partnership, and as such do not own the whole of your business, then lenders will calculate how much you can borrow directly relative to your percentage share of the organisation. Namely, how much of the net profit you are personally entitled to.
Am I eligible for a mortgage using retained profits?
Your eligibility for a mortgage using retained profits is wholly determined by how well your personal and financial profile aligns with the specific set of criteria used by your chosen lender. And this isn’t just relevant to mortgages using retained profits specifically, there are universal markers that all mortgage providers look to which denote if a candidate is ideal or not.
As said, lenders are required to assess both your financial and personal stability. The way they do this is by carrying out a hard credit check. This involves them viewing your credit score, which will display any indications of poor money management, as well as whether you’ve ever had adverse credit, a court county judgement (CCJ), an IVA, or if you’ve filed for bankruptcy or failed to keep up with payday loans in the past. If any of these factors are returned during a credit check, then they will each have an independent negative impact upon your overall application, with some lenders even rejecting you for their presence. However, the longer ago that these elements occurred, the more favourable your chances at securing a mortgage deal are. Moreover, every lender uses a variable set of criteria, meaning that some will judge you less severely than others for such instances.
It’s notable that hard credit checks leave a mark on your report. So, If you want to grasp a notion of your current suitability before you apply, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Making use of it will help you in spotting potential mistakes and fraudulent activity so that you can deal with any problems quickly & efficiently. The trial and subscription can be cancelled at any time.
How much can I borrow for a mortgage using retained profits?
How much you can borrow for a mortgage using retained profits is dictated by your affordability. Conventionally, lenders will gauge one’s affordability by assessing a personal income, as opposed to a business income. Evidently, in the case of someone who is self-employed, the calculation differs.
For a lender to get an accurate estimate of the size of the mortgage you’d be able to afford, they’d generally consider your salary, as well as your dividends, and multiply this by 4, as per the aforementioned rule of thumb. Although, it’s easy to see that your net profits are likely to equal a much higher sum than this combination. It’s for this reason why a lot of self-employed people entertain the idea of a mortgage using retained profits, so that they can purchase a house with a greater market value. The foremost difficulty lies in finding a specialist lender for the task, since only a select few offer retained profit mortgages.
Such lenders will want firm evidence that your business, and your position in it, are strong. As such, any substantial losses or significant fluctuations in your net profit over the previous years will be reflected accordingly. It isn’t unusual for lenders to reject an application for a mortgage using retained profits if your business’ recent years exhibit financial precariousness. Alongside this, mortgage providers are required to confirm your identity, age, a registered business address, and verify your announced profit by looking at your tax accounts. All of these aspects are to be fulfilled because lenders prefer not to have ‘high-risk’ clients, i.e., those who might not be able to sustain the necessary monthly repayments, in addition to paying out the regular fees and charges. This is heightened too if you are a first-time buyer.
What deposit do I need for a mortgage using retained profits?
Assuming that your eligibility and affordability is satisfactory for a retained profit mortgage, the next integral facet of your application is the size of the mortgage deposit you’re willing to put down. Saving up for a substantial mortgage deposit is perhaps the most formidable obstacle to overcome before getting your hands on your very own property. It is a process that involves a lot of time and dedication. However, if you invest your efforts wisely, then you’ll have access to the best deals on the market, those which subject you to competitive interest rates. This ultimately means that providing a considerable initial sum leaves you to reap long-term gains.
The minimum mortgage deposit that you must amass, again, varies from lender to lender. Although, as a guideline, the bare minimum for a mortgage using retained profits is typically around 10% of a property’s total price. It should be noted that the lower your mortgage deposit is, the narrower your options will gradually become. And conversely, the higher your deposit, the more choice you’ll have available to you. This is because your ability to save for a decent deposit categorically suggests your financial capabilities, as seen in the eyes of mortgage providers everywhere. We reiterate here that lenders are more likely to accept applicants who have a high degree of monetary responsibility. A further plus is that, if your deposit is sizable, this will work to negate any previous instances which would otherwise adversely affect your suitability, such as having set up a new business, or harbouring a low to fair credit score.
How to apply for a mortgage using retained profits
As we’ve illustrated throughout, there are involvements within a mortgage using retained profits that are quite distinct from the standard mortgage process, and these distinctions are relevant to both the lender and the borrower.
For instance, if you are currently employed but run a business on the side, you may want to use your net profit instead of your personal income to fund the investment. There are a multitude of variables to consider when browsing for retained profit mortgages. Whatever your decision is, your ability to secure a loan is entirely down to your individual circumstances & financial situation, as well as your capacity to locate a specialised lender who meets your needs.
This may prove to be the most trying aspect of getting a retained profit mortgage. If you aren’t advised correctly, you could end up searching tirelessly before being rejected. This is precisely the point where we come in. We at The Mortgage Genie have a comprehensive understanding on how to get a mortgage and are dedicated to helping people secure loans of all types. We hope that this article has cleared up any doubts and addressed any queries which you had surrounding mortgages using retained profits.
Each day we assist an increasing number of people in finding a mortgage product that’s specifically tailored to their requirements and guiding them through every step of the, often complex, way. If you’re in need of a team of expert mortgage brokers then feel free to get in touch today at 01915809890 and we’ll set you on the path towards becoming a homeowner! And why not see how much you could borrow up to today by using our mortgage calculator?