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Paystream - Accountancy
The advantages of using Paystream’s service for your accounting needs are numerous.
For example, you are safe in the knowledge that you will not pay eye-watering PAYE tax bills, and that you have accounting software at your fingertips. You also have a dedicated accountant and unlimited support, and all of this from a 5 out of 5 rated service!
But why do lenders make it more difficult to get a mortgage for limited company contractors and independent professionals than they do for permanent employees?
This guide will break down the reasons why by giving you insights into how lenders assess income, and the disadvantages of going it alone directly with a lender or with a non-specialist adviser.
Affordability Calculation
How banks and nonspecialist brokers assess income for mortgages
Every mortgage lender will want to know that you can afford to make repayments on the mortgage. They will have specific calculation tools they use to determine affordability. The very first step in mortgage underwriting is to define annual income before the affordability calculations are done.
For employees, this will usually mean the latest three months’ payslips, and maybe the latest P60 as well if the lender needs more reassurance. These are used to determine gross annual salary.
With the example to the left, the total gross earnings are circled, and this figure will be multiplied over 12 months to give the gross annual income figure for the mortgage application. The income for this applicant would be £38,800 for mortgage assessment purposes.
Although lenders do not strictly work on income multiple anymore, a typical lending amount is 4.5 times annual income, so very simply this applicant could borrow £174,600.
Experience Counts
Assessing the P&L
If we now examine how mortgage lenders and non-specialist advisers assess trading accounts for limited companies, you will see where issues can arise.
The image to the right shows the Profit and Loss section of the trading accounts of a contractor’s limited company.
A mortgage lender will typically focus on the company’s profit for 100% contractor-owned companies. This is circled below for the two most recent tax years. The lender will then either take an average of the profit if the profit is increasing, or use the most recent year if it is decreasing. In this case we have a figure of £68,229 to use. The lender will add the Director’s salary to this figure to get the total income for the mortgage application. The salary is £12,500 per year, so we have a total income for mortgage purposes of £80,729. Applying the same 4.5 times income, we have a maximum loan of £363,280.
The first difference between employed and self-employed assessment is the lender looks at income after tax for the self-employed, but before tax for the employed. If you thought this was harsh, they also look at income trends over two years for the limited company, but only three months for the employee!
The key thing to point out about the limited company in this example, is they work on a contract rate of £450 per day, five days per week. It should be mentioned that getting a lender to company profit before tax is not a walk in the park – most will use the profit after tax or the amount of dividends taken from the business, further reducing the income. In this example, dividends of £38,000 were taken from the business to keep the tax at a lower rate, so most lenders would use £38,000 + £12,500 salary. This would give an income of £50,500 and a maximum loan of around £227,250.
The non-specialist advisers frequently encounter affordability issues based on income used from the trading accounts, or from reference requests by the lender into the accountant to ask why there is a reducing income. Both mean there is a stronger likelihood of a declined application.
Why use PayStream
Compliance matters to us – We’re proud to be fully accredited by FCSA, Customer Service Excellence and we’re an APSCo trusted partner.
Award winning service – Voted Best Contractor Accountant three times overall at the Contracting Awards.
Industry leading online functionality – Our purpose-built accounting software is available to put your contractors’ limited company finances at their fingertips.
A range of services – From proactive tax advice to support with payroll processing, our range of services allows the client to create a tailored package that’s bespoke to their business.
We take cyber-security seriously – We’ve invested heavily in our IT and security infrastructure, achieving the highly commended Cyber Essentials PLUS and ISO certification.
Experience in all sectors – Whatever the industry – IT, education, construction, you name it – we’ve got the experience and know-how.
Call 0161 929 6000, email info@paystream.co.uk or visit our website for more information.
There are many reasons to use PayStream
- Salary sacrifice for personal pension plans with major UK providers, saving contractors £000s in PAYE and NI
- We pass on the employer NI saving from salary sacrifice pension contributions in the form of additional gross pay
- Voted Best Umbrella Companyin The Contracting Awards 2023 (third year running), as well as Best Umbrella Company three years running (five times overall) in the Contractor UK Reader Awards
- We take cyber-security seriously investing heavily in our IT and security infrastructure and achieving the highly commended Cyber Essentials PLUS and ISO certification.
- Comprehensive insurance cover worth £20m included
- Access to personal tax-planning experts
- Tax relief on allowable business expenses
- Text messages to confirm when payments are due
- Free employee rewards scheme with discounts and cashback at over 7,000 retailers
- Employee loyalty scheme with £000s in prizes each month
- Specialist mortgage products from brokers and lenders catering for umbrella company contractors
Call 0161 929 6000, email info@paystream.co.uk or visit our website for more information.