• David Tarry MBA

Lending to Self-Employed Borrowers

Most lenders will lend to the self-employed and base the borrower’s affordability to service the loan on their net profit before tax.


However, how each lender calculates a net profit figure for borrowing purposes varies. It also depends how the borrower operates his business – as a sole trader or through a limited company.


Sole traders


Most lenders will take the average of the last two years’ profits but if your profits are down year-on-year, they will use only the latest year.


Other lenders will use just the latest year’s figure regardless.


Directors of limited companies (where the borrower owns 20% or more shares)


Most lenders will use the director’s salary plus dividends. Again, some lenders will take an average of the last two years’ salary and dividends if the amount has increased year-on-year but only the last year’s salary and dividends if the amount has decreased. Other lenders will only use the latest year’s figures regardless.


However, it’s also the case that a few lenders recognise that a director may not need to withdraw all the profit as salary or dividend thus reducing their personal tax liability.


In these circumstances these lenders will allow the affordability calculation to include salary plus a share of the net profit for the director, which, in turn, sometimes allows the director to borrow more than normal.


For example:


Recently a couple approached to remortgage their property.


The husband owns 56% of a limited company which has been trading for 9 years. He earns a salary of £8,500 per year plus dividends of £31,000 giving him a total taxable income of £39,500.


The husband’s salary and dividends would support a loan in the region of £190,000.

However, the company generated a profit in excess of £120,000, so when I analysed how much this alternative calculation could mean they could borrow this figure increased to over £400,000 for the clients….more than doubling their potential borrowing capacity!




In these types of scenarios, understanding which lender to approach is crucial, so if you are self-employed and need some advice or guidance, please do get in touch.

Contact Me Directly 

David Tarry MBA

Merewood Financial Services

57 Park Road

Cowes

United Kingdom

PO31 7LY

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Or Call 01983 875151 - 0207 867 3990 - 0771 476 2597

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Merewood Financial Services is a trading style of David Tarry, who is an Appointed Representative of The Right Mortgage Ltd, which is authorised and regulated by the Financial Conduct Authority.  Telephone calls made to Merewood Financial Services and/or The Right Mortgage Ltd may be recorded and used for training and/or regulatory purposes.

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We are not authorised to provide advice on Investments, Tax Advice, Pensions and Savings but can refer customers to a specialist who can assist in this area. The information contained in this website is subject to UK regulatory regime and is therefore intended for consumers based in the UK.  

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