Mortgages

There must be something in the air; whether it’s rapidly rising house prices, changes in the markets or the fact that we’re coming out of a pandemic, but many of my clients are currently looking to move house, buy their first home or are in the process of re-mortgaging.

I’ve had many conversations recently around the practical financial implications of new mortgages, so I thought a blog post on this is called for!

I’m covering this from an accounting point of view, so specifically the factors to think about when managing the finances of your business and how they may impact current or future mortgage applications is my angle.

The financial information you’ll need for a mortgage application comes from:

Your filed company accounts with Companies House and corporation tax return with HMRC (if you run your business through a limited company); and

Your filed personal tax returns with HMRC.

It’s important to highlight the word filed in that paragraph; one of the key parts of the mortgage application process will be evidence of your earnings, so your broker won’t accept just your word, or even the word of your accountant, alone. They will want to see proof that the income and tax paid is actually recorded with HMRC.

It’s usual for mortgage brokers to ask for the last two years’ filed information for each, so you’ll need to make sure you have access to these, and that your company accounts and personal tax returns are up to date, if you want more recent earnings to be taken into account.

(Yes, the purpose of this blog is also to highlight the importance of keeping your accounting records accurately and up to date!)

What they want to see are factors of affordability. Your earnings need to
support the repayments required on the mortgage amount you want to borrow, alongside your other regular outgoings, such as household bills, food and family requirements.

Earnings include your salary processed through the company, along with dividends that you pay yourself over the course of each tax year.

And this is where you have some control with the decision making for your business. It’s also where planning ahead for your future goals is really important as part of your overall strategy.

Many times, the goal for business owners is to minimise the amount of tax paid, but this will be counter-intuitive if you have aspirations of future financing arrangements so it’s important to realistically think ahead.

Your income goals need to match the expectations for a mortgage provider for your amount of borrowing of choice. I spoke with a mortgage adviser recently and their expectation was that the annual earnings of the director should be around 10% of the overall borrowing facility. This is obviously just one example, so you would need to seek advice directly from mortgage advisers to find out what this would be for you.

Looking at what you pay yourself now, combining salary and dividends, and adding a zero on the end could therefore be a good place to start in terms of how much finance you would be able to obtain.

There are, of course multiple factors involved. Whether the application will be a joint one or not, what your deposit size will be, how long you want to repay your mortgage over, your age, your credit score, any other debt you have, and other financial decisions all play a part, but you can use your business now to help to build the finances that you need to support that dream purchase in the future.

Please note I’m not a mortgage adviser. If you’re in the market for a mortgage, then an independent broker or an adviser from your bank or lender of choice should be where you direct specific questions. I can’t advise on particular products either; these will be dependent on your own circumstances.

I can recommend two lovely advisers if you’re in need of where to go:

Claire Sweet at Blue Print Financial Solutions Ltd – Claire at Blueprint

Sam Cattell at Mindful Mortgages – Mindful Mortgages | Leicestershire Mortgage Broker