Comments from Sharon Duckworth, director and senior mortgage broker at Key Mortgage Advice
The housing market changed dramatically during COVID, fluctuating between unprecedented buoyancy to major slowdowns. There was always going to be a legacy of this behaviour, but the main challenges for self-employed individuals and company directors have only just started to rear their heads.
Up until a few months ago, lenders were granting mortgages to the self-employed solely based on their company accounts. But of course, they didn’t include the months following the pandemic lockdowns. And apart from a mortgage applicant simply saying ‘my business hasn’t been affected by COVID’, they had very little evidence to prove otherwise.
Changes to applications
Realising this, slowly but surely, lenders began introducing requirements for more proof of how businesses had weathered the COVID storm. Much of this centres on bank statements; in addition to requesting three months’ worth of personal bank statements, banks also began requesting three to six months’ worth of business bank statements to assess the amount of revenue going into a business account each month. Simple because bank statements leave no place to hide.
If a business stated it was turning over £120,000 a year, it was expected that c.£10,000 should enter the business bank account every month. Additionally, the provision of business bank statements provided clarity on whether applicants had received any money from HMRC or their local authority via the multiple Coronavirus grants, loans, or the furlough scheme. If an individual had said they hadn’t been affected by the pandemic but their statements proved they’d received certain grants and loans, their claims were contradicted, and showed the owner had felt the business was in difficulty at some point.
The state of the mortgage market
Most lenders will assess affordability as a combination of salary and the dividends drawn, which will see company directors penalised during the mortgage application if they don’t draw huge dividends. Some lenders work on salary and the net profit after tax, which is a perfect option if the director hasn’t taken large dividends. However, there are also directors that only draw income from their directors loan account, which some lenders do not accept. Some lenders also work on the last two years of trading figures, some work on three and some work on one. Some lenders aren’t even working off 2021 figures and are only looking at those pre-COVID.
To this day, some lenders still don’t mind how many years of accounts you have or how you draw a salary, as long as you can prove you can pay the mortgage each month. Others, sadly, won’t lend if an applicant has claimed from the government during the pandemic. Then there’s a middle ground of lenders that, depending on what sector you operate in, will consider other factors and count furlough, government grants and bounce back loans, for example, as income.
On 2021 accounts, there are now two boxes for turnover, one which states general turnover and another income such as grants. Some lenders will now deduct that second column from the profitability of the business. For example, if your net profit was £20,000 but you took a £10,000 grant, they would deduct this, regardless of what it was spent on.
So, why should company directors come to a mortgage advisor?
Banks don’t want to act as mortgage advisers, so you should consider all the benefits of not applying to them directly.
Working with a specialist mortgage advisor creates a more streamlined and more efficient process for the customer. Plus, if you deal with a mortgage advisor you’re never going to be penalised with a poor rate because banks reward people taking this route. In fact, there are often incentives in place whereby a mortgage adviser could source a slightly cheaper rate or cash back option, rather than a customer applying directly.
Our job as mortgage advisors is to understand the lender’s policy and make sure all the boxes are ticked to get your mortgage in place. We essentially underwrite the mortgage before the lender sees it, which means that 99 per cent of applications are accepted.
The support and confidence you get from a mortgage advisor is unparalleled because we hold our customers’ hand throughout the process; to us, this isn’t and can’t be transactional. We look at your circumstances in the past and present, and make predictions for the future to advise accordingly. Our time to offer period is also 17 days which with a bank is usually five weeks. Mortgages must be personalised to the individual in question and it’s our job to find the best deal that works for you.
Self-employed company directors shouldn’t have to face the new challenges of mortgage applications alone; work with an expert who can simplify the hurdles, make the process pain free and guarantee success so your house move is one less thing to worry about.
To find out more, contact Sharon Duckworth on firstname.lastname@example.org.