Self-employed net profit mortgages explained

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When you’re self-employed, getting a mortgage can be more complicated than it is for those in more traditional employment. You might be worried that your lending options are more limited, After all, most lenders will be cautious of lending to those who work for themselves. However, it’s worth noting that some lenders will be more than happy to work with you, given the right circumstances.

If you are self-employed, a net profit mortgage is one way that you could get on the property ladder. In this blog post, we will explain what is involved with a net profit mortgage and how you could go about securing one.

What is a net profit mortgage?

A net profit mortgage is one where the lending decision rests on the net profit of your business. Whether you are a sole trader or a company director, you could be eligible for a net profit mortgage. Lenders will take one of two approaches to determining eligibility. 

Lenders will either look at the net profit before tax or after tax. This means that there can be huge discrepancies in the amount of money a lender is willing to offer. While some might reject an application based on post-tax profits, others might say yes to your application. This is why it is always worth shopping around when you are looking for a self-employed mortgage. Some mortgage brokers have vast experience dealing with net profit mortgages and this makes them ideally placed to offer advice and guidance.

If you need help navigating the world of net profit mortgages, make an enquiry with Niche Mortgage Info today and we’ll put you in touch with the best experts for your needs.

Am I eligible for a self employed mortgage based on net profit?

If you own you own business then mortgage providers will consider you to be self employed. This means that you generate profit rather than earn a salary. Your total income minus your business expenses is your net profit, and this is often the figure lenders will use to calculate affordability. You are eligible for a net profit mortgage if you are:

  • A freelancer or sole trader
  • Part of a partnership
  • A director in a limited company

In addition to meeting the requirements above, you will also need to satisfy the following requirements. Lenders will look at the following to make a lending decision.

  • How long your business has been trading
  • The amount of deposit you have saved
  • Your credit history
  • Your age at the time of application

How does the process differ for sole traders and company directors?

Sole traders and company directors will calculate their income in different ways. This means that lenders will be interested in different things depending on your self-employed status.

Net profit mortgages for sole traders

The main consideration for lenders will be fluctuations in your income. This is because they are mostly concerned with the affordability of the loan. For example, if they can see that your profit has increased year-on-year, then they may use the lower figure to calculate how much they will lend you to be cautious. Some lenders will take the most recent year’s profits to calculate affordability and others will take an average of the past few years.

In cases where your net profit has fallen, some lenders will not accept your application if your income has fallen by more than 20%. This is because it signals income instability and could indicate that you might not be able to keep up with future mortgage payments if your net profits were to fall again.

Net profit mortgages for company directors

Income for directors will be different to that of self employed individuals. If you are the director of a company, lenders will look at the salary and dividends you withdraw to calculate affordability. Some will also consider your share of the company retained profits, which can increase the amount you can afford to borrow.

How much deposit do I need to get a net profit mortgage?

There isn’t a set amount that you need to save as every lender will assess each mortgage application on its own merit. The amount of deposit you require will all depend on your personal circumstances and the level of risk. If you have a long trading history and a good credit history then you may be able to secure a mortgage with a smaller deposit.

As a general rule, the more deposit you can provide, the better rate you will be able to secure. By saving a larger deposit, you will be applying for a low LTV (loan-to-value). Aim for at least 15% of the property value and you should have access to a wide range of lending options.

Will a net profit mortgage calculator help me?

There are net profit mortgage calculators available which can help you work out how much deposit you need and how much you might be able to borrow. However, you should remember that these are only a rough indication and do not guarantee that a lender will accept your application or lend you that amount. Instead, you should rely on speaking to a specialist on the subject by getting in touch with Niche Mortgage Info today.

How much can I borrow with a net profit mortgage?

This will all vary depending on the lender. But there are several factors you can think about which will help you to determine how much you might be able to borrow. As a general rule, the higher the loan you want, the more evidence you will need to provide. For example, a loan of £500,000 will require more extensive trading history. If you’ve been trading for less than a year, you are unlikely to be eligible.

In addition to evidence of past earnings, some lenders may also ask to see evidence of future earnings. This could be in the form of contracts for future work or retainer contracts. Once you have satisfied the earnings portion of a mortgage application, you will have access to the same products as other applicants. Most lenders will offer a multiple of your income, usually around 4x, 4.5x or even 5x in some circumstances. 

How do I apply for a net profit mortgage?

Many people assume that self employed individuals have access to different mortgage products. This isn’t really the case. Instead, the mortgage application process is different, but once you have passed all of the checks, you have access to the same products. The first step to securing a net profit mortgage is to seek the advice of a broker with access to the full range of lenders. As you are looking for a niche mortgage product, it makes sense to shop around to make sure you get a good deal.

Before you apply for a net profit mortgage, you should think about the following factors:

Affordability

Perhaps the most important thing to think about when looking for a mortgage is the affordability. You might feel confident that business is booming and you’ll easily be able to make the payments, but you need to be able to demonstrate why this is the case to your lender. Expect to be asked for copies of your tax returns to prove income. They may also want to see your accounts to see how regular your income is. And finally, they may want to see evidence of current and future contracts to determine the viability of your business.

How does bad credit affect a net profit mortgage?

Having poor credit history won’t necessarily rule you out of being able to secure a mortgage, but it can make it more expensive. Any kind of lending will become more difficult and more expensive when you have poor credit history. You will need to show that your current financial situation won’t hinder your ability to pay back your loan. You may also need to provide a larger deposit in order to minimise the risk to the lender. This could be as much as 20% in some cases, but again, this will all vary based on the lender.

Can I get a buy to let property with a net profit mortgage?

Provided you can meet the requirements set out by the lender, you should be able to get a mortgage for a buy to let property. In general, rates for buy to let properties are higher and you may also be asked to provide a larger deposit.

Why you should get expert advice for your net profit mortgage

Mortgage applications are complicated at the best of times and it can be difficult to know where to turn to for the best advice. Everyone is different, which means every mortgage application is different. The best place to start when thinking about a net profit mortgage for the self employed is to speak to a broker. Brokers are trained to know which lenders are more likely to accept an application based on an individual’s circumstances. They will be able to open the door to niche and specialist lenders who you might not have previously considered.

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