Mortgages for new business owners: What you need to know
Starting a business and buying a home; can start-up entrepreneurs have their cake and eat it too? Pandle's Lee Murphy offers crucial insight...
They are two of the biggest things you can do in life – but do buying a home and starting a business go hand-in-hand?
For many new business owners, the prospect of securing a mortgage fills them with dread. Judging by the number of client enquiries I receive many still fear that a freshly-formed business will, in the eyes of lenders’ underwriters, disqualify them from mortgage eligibility.
On the flip side, many would-be business owners are forced to prioritise, preferring to defer their career ambitions, to secure their family home first. Only returning to their business dreams, sometimes years, later.
But the anxiety around the implications of starting a business on your mortgage eligibility doesn’t need to be so thorny.
It’s getting easier to get a mortgage as an entrepreneur
It's true that, historically, securing a home has been less straightforward for the self-employed than for PAYE employees. But, while in years gone by many lenders have shut up shop when approached by fledgling entrepreneurs, I have good news as most have now relaxed their rules.
More specifically, whilst lenders all used to operate different criteria when it comes to assessing mortgage applications, many have now standardised the way they judge affordability. And the pool of lenders and products available to business owners is growing all the time.
So, don’t worry – just like for your salaried friends, as long as your finances are fundamentally sound the chances are that you will get a mortgage.
How to navigate the mortgage application process if you're a business owner
Many new business owners stress that mortgage lenders will require three years’ of good accounts against which to judge an application. Yet, whilst three years typically remains the period underwriters tend to look back on, the focus of their energies has changed.
Rather than dive in to your company accounts, most lenders now want to see your personal tax calculation. That means, just like PAYE employees, you need to show lenders proof of earnings after tax.
For employees that means sending over three years’ of end-of-year P60 forms and wage slips, but for self-employed people it means sending three copies of SA302 – the annual tax calculation breakdown available for download from your HMRC online account.
For business owners or prospective entrepreneurs for whom the required three years may span a mixture of both employment and self-employment, the SA302s can automatically bridge both categories.
Remember, your lender is not interested in the health of your business – as long as you can demonstrate a viable flow of cash – whether in dividends or salary – to your personal finances.
Plan your business finances
This doesn’t mean, however, that, when you want to buy a house you can embark on a new business with impunity.
Yes, there are fewer technical hurdles to securing a mortgage but you must nevertheless consider the impact of starting a busines on your underlying finances.
Going into business can come with significant set-up costs, like premises, staffing, and stock, and, at the start, earnings may be slow. These upfront costs can mean an enforced, if temporary, reduction in your own salary and this is something that would reduce your income and would show on the SA302 presented to mortgage lenders.
You want to avoid getting into a situation where you are forced to defend your business plan or attempt to justify first-year set-up costs as one-off as this could cause delays to the whole process.
And, whilst you could happily run your company at a loss in order to draw enough in salary to satisfy your underwriter, you must avoid gaming your company’s tax return just to play the system.
Think ahead, get advice
Although mortgage lenders these days are more inclined to look at self-starters, you have a responsibility to yourself to make the right decisions. Is it really the best idea to start a business and hitch your wagon to a mortgage at the same time?
Draw up a personal budget which is linked to your projected business income, and, considering that historic-low interest rates are bound to rise at some point, assess whether your business potential leaves you with scope to dig deeper into your pockets for increased future fees.
Above all, get a mortgage broker. Like accountants, they will be able to provide professional advice tailored to your specific information and they will have full view of all the products available in the marketplace.
If you think clearly and plan ahead there is no reason you can’t achieve a new listing at both Companies House and your own new house!
Lee Murphy is owner of accountancy software company Pandle.