Mortgage tips for high network individuals and business owners

In this Q&A, business leader, author, and mortgage adviser, Gary Das – founder of Active Financial – discusses the difficulties SME business owners face when applying for a mortgage.

What are the main hurdles business owners face in securing a mortgage?

There are many challenges, which range heavily between the individual, the amount they are looking to borrow, and the lender they are looking to borrow from. Essentially many cases are like trying to put a square peg into a round hole when it comes to self-employed borrowing criteria – particularly as it differs between lenders – with key ‘issues’ often including:

Multiple streams of income: many business owners will have multiple streams of income from several limited companies, dividends, property rental income etc.

Profits exceeding dividends: the majority of lenders will only consider dividends as opposed to net profit and I personally experienced a ‘no’ for that reason. Yet, there are many lenders who will consider net profit instead, so it’s worth shopping around or working with a mortgage broker who knows the lenders who are more favourable to business owners.

Other income streams: complex income bonus or renumeration packages, together with any foreign based income or living off Director’s loans could all result in potential challenges and will essentially increase this square peg round hole misfit.

Director and car loans: any director or car loans that are in personal names but paid for by the business and included in company accounts will raise questions.

Business profitability: it’s important to remember that most lenders will average the profit of the last two full years of accounts, so even if you’re having a more successful current financial year, it won’t be counted as part of the application.

What do business owners need to consider when applying for a new mortgage? How far in advance should they plan and why?

There are many things business owners need to consider when applying for a new mortgage. Unlike employed people who are only required to submit 3 months’ worth of payslips for proof of income, business owners will need to show a lot more and over a longer time period, meaning if you are looking to move house in the next 12–24 months, you need to think one step ahead and reverse engineer for deposit, profit, salary, expenses, turnover, and business structures to ensure you are in the strongest possible position.

There is real benefit to this though, as by ensuring a business is being built for growth and targets are being set achieve the lifestyle you want – not only will you improve the growth and success of your business, but you will also be able to achieve the lifestyle you want in the process.

It’s also important to remember that personal mortgages are based on affordability, so maintaining a high credit rating, minimising personal debt, and repaying any form of outstanding personal overdraft is key.

What are the main ‘myths’ around securing a mortgage when self-employed?

There are five key myths that are commonplace with self-employed mortgages, detailed as follows:

  • You need three-years of annual accounts [the majority of lenders will only require two years]
  • You can only use salary and dividends
  • You need a large deposit
  • You can’t get a mortgage with bad credit
  • You won’t be able to get an interest only mortgage

What level of income does a self-employed individual typically need to have in order to purchase a £1 million plus property?

Ultimately, the mortgage dictates the income. If you are looking to purchase a property for £1 million, you need at least a 10% deposit meaning you will require a mortgage of £900,000.

To achieve a mortgage at this level, you would need an individual or joint income of approximately £200,000, but overall it is dependent on personal debt, individual credit score, age, number of dependents, etc.

This is where it’s extremely beneficial to be able to source and secure a lender who will consider net profit and salary as not only will it make a massive difference to tax savings in not having to draw down large dividends to prove income, but the profit levels will be greater than the dividend, meaning the lending figure should be higher.

What are the main insights and lessons you share your book: ‘The Self-Employed Mortgage Guide: The Key to Buying Any Property’, and can these steps really help self-employed individuals buy any property?

I wrote this book to outline the challenges I had personally faced in securing a mortgage as a business owner, while also showcasing how other entrepreneurs had also struggled to secure the finance required – mainly due to myths and misconceptions surrounding self-employed mortgages.

Within the book, I also introduce my Active Methodology, which helps business owners take control of the mortgage application process, while eliminating unnecessary difficulty and stress.

These steps include:

  • Affordability: understand how much you can borrow and reverse engineer your goals to ensure you can drive the level of growth and profitability required to secure your dream home.
  • Criteria: match the criteria to your circumstances so that you’re a square peg in a square hole and the application process runs smoothly.
  • Terms: think about what sort of mortgage term and monthly repayment you desire in advance and work towards achieving the best possible loan to value. Not only will this result in the lowest possible interest rates, but it will also enable you to secure a great deal while reducing tax liabilities and fees.
  • Identify: focus on the home you want and be confident in obtaining the required finance and mortgage to secure it.
  • Victory: doing as much preparation and work in advance, enables you to get through the application process and secure a mortgage offer with minimal stress.
  • Entrepreneurial: take an entrepreneurial approach to self-employed mortgages and think about how you can leverage and maximise profits to invest in property.

How do you foresee mortgage rates changing in 2024 and what impact will this have on the property market?

I don’t have a crystal ball, but my personal opinion is we are in a competitive market with less property business being transacted, which means lenders are fighting for market share, so interest rates have been coming down.

Longer-term, I think it depends on how the property market evolves this year – where some houses are flying off the shelves, others are taking a very long time to sell so most people need to accept that they are going to be paying more for property and that this interest rate correction has been long overdue, with the market unlikely to see rates at the all-time low of 1% for the foreseeable future.

As a result, we are seeing a significant number of people opting to improve and develop their homes over moving house due to having secured a lower rate previously and not wanting to face an increase in mortgage payments unnecessarily.

Interest rates will remain stable this year before we begin to see steady decreases in 2025 and 2026 – hopefully.