We recently helped our customer secure a mortgage to purchase a semi-detached house in Farnham, Surrey. Our customer was a self-employed builder who had chosen to retain profits in the business rather than take them all as dividends.
That made the way a lender assessed income especially important. Looking only at salary and dividends would not support the full mortgage our customer needed. We found that Accord could consider our customer’s share of net profit and secured the £344,215 loan required for the purchase.
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The Scenario
Our customer, aged 41, wanted to buy a new home in Farnham for £405,000. They needed a residential mortgage of £344,215 over 30 years and wanted a two-year fixed-rate product.
Our customer had a good credit history, no liabilities and a higher level of income. The question was how that income would be measured for the mortgage application. As a self-employed builder, our customer had chosen to leave profits in the business rather than draw them as dividends.
The difference between the purchase price and mortgage amount was £60,785. That meant the proposed mortgage was approximately 85% of the property’s value. This percentage is called the loan-to-value, or LTV.
Although the purchase figures were clear, affordability depended on finding a lender whose income assessment reflected our customer’s circumstances. A lender using only salary and dividends would reach a different borrowing figure from one willing to consider our customer’s share of net profit.
The Challenge
Finding a self-employed mortgage using net profit
Our customer needed the full £344,215 to proceed with the purchase. The difficulty was that much of the income available for a lender to assess was represented by profit retained in the business, rather than dividends paid to our customer.
- Income had been retained in the business. Our customer had chosen not to take all available profit as dividends. A lender looking only at salary and dividends would therefore have a limited picture of the income relevant to this application.
- Lenders assess self-employed income differently. The lender’s approach mattered as much as the figures themselves. We needed one that could consider our customer’s share of net profit.
- The full loan amount was required. It was not enough for a lender to accept net profit in principle. Its assessment also needed to support the £344,215 mortgage our customer needed for the Farnham purchase.
These points were connected. A mortgage product might have appeared suitable based on the deposit and property price, but it would not help if the lender’s income rules resulted in a lower borrowing amount. We needed to establish how the lender would treat the retained profits before recommending a product.
What We Did
We reviewed our customer’s circumstances and focused our lender research on the way self-employed income would be assessed. In particular, we looked for a lender able to use our customer’s share of net profit rather than relying only on salary and dividends.
That distinction was central to the case. Retaining profit in a business can be a deliberate choice, but a mortgage application still has to meet the chosen lender’s affordability rules. We needed to match our customer with a lender whose approach could support the purchase they wanted to make.
We found that Accord could consider the net profit and the full loan amount required. We then assessed the mortgage against the £405,000 purchase price, the proposed 30-year term and our customer’s preference for a two-year fixed rate.
Once we had confirmed that the lender’s income approach worked for this application, we arranged the mortgage with Accord. This addressed the specific issue that could have limited our customer’s borrowing under a salary-and-dividends assessment.
The Solution
We secured a residential purchase mortgage with Accord on the following basis:
- Purchase price: £405,000
- Deposit: £60,785
- Mortgage amount: £344,215
- Loan-to-value: Approximately 85%
- Mortgage term: 30 years
- Initial product: Two-year fixed rate
- Income assessment: Our customer’s share of net profit could be considered
The product provided the full mortgage amount required. The fixed-rate period also matched the type of product our customer wanted for the start of the mortgage.
Why the Solution Worked
- Accord could assess the relevant income. The lender could consider our customer’s share of net profit, which was important because profits had been retained rather than taken as dividends.
- The full borrowing requirement was met. Accord’s assessment supported the £344,215 mortgage needed for the purchase.
- The product matched the purchase. The mortgage worked with the £405,000 property price and the customer’s available deposit.
- It met our customer’s product preference. The two-year fixed rate provided a set rate for the initial period of the mortgage.
The outcome depended on the lender’s income criteria. Finding a lender willing to consider net profit was useful because it also allowed our customer to borrow the amount needed for this particular home.
The Result
Our customer secured the full £344,215 mortgage with Accord, allowing them to proceed with their purchase in Farnham. They were happy with the service and with the fact that their share of net profit could be used to support the borrowing required.
The case was resolved by identifying a lender whose treatment of self-employed income fitted how our customer ran their finances. That made the difference between assessing only the dividends they had taken and considering the profit relevant to the mortgage application.
What This Case Shows
If you are self-employed and retain profits in your business, your salary and dividends may not tell the whole story of your income. Mortgage lenders have different approaches to assessing self-employed applicants, and those differences can affect how much you may be able to borrow.
This Farnham purchase shows why it helps to check income criteria before choosing a self-employed mortgage product. The right approach depends on your business, your finances and the lender’s requirements; being able to consider net profit does not guarantee a particular loan amount.
Need a Mortgage That Considers Retained Profits?
If you are self-employed and have left profits in your business rather than taking them as dividends, Kerr & Watson can review your circumstances and look at suitable mortgage options for your purchase.
We can assess how lenders may treat your income and whether the borrowing you need appears achievable.
Contact Kerr & Watson to discuss your plans and the property you want to buy.
