When it comes to applying for a holiday let mortgage, if you are self-employed you might be wondering, ‘Can I get a mortgage?’ The good news is that, yes, you can! From our experience, we often find that self-employed people are nervous about their eligibility for a holiday let mortgage. This is for good reason, as the application process for them can be rather complex. Luckily, it’s something that HCM deals with all the time, so you’re in good hands!
Whether you’re a limited company, sole trader or partner, we’ve put together this guide for you – discussing what holiday let mortgage lenders require, what they don’t want to see in an application, and addressing the questions that we’re so frequently asked.
Holiday let mortgages involve assessing three key things:
- The property, in terms of its suitability for mortgage security. Check out our guide on what lenders don’t like here.
- The holiday let rental potential of the property.
- The mortgage applicant.
When it comes to the applicant, the fundamental thing that mortgage lenders will look at is their personal income. This is because mortgage lenders are trying to understand how the applicant can afford to continue to pay the mortgage if the holiday let property doesn’t generate bookings and remains empty. Think Covid-19!
What does self-employed mean?
From a mortgage lender’s point of view, self-employed is classed as anyone who is in control of their earnings. This encompasses limited company directors/shareholders, sole traders, and partners.
If you operate via a limited company and pay yourself a salary, you will think of yourself as an employee, right? Whilst this is technically true, this is not how the lender will see things!
If you are employed through a limited company in which you own more than 20% of the share capital, then the lender considers that you have significant control over what happens in that company. As such, they believe that you can decide what you are paid and so are not really an employee in the traditional sense; a regular employee would never have that sort of power.
This structure is very common amongst many trades as it saves a lot of the financial administration of running a limited company. Such arrangements are considered to be self-employed.
Similar in many ways to a sole trader, a partner is less common as a trading style, and is very much considered to be self-employment.
How do lenders assess income?
In most cases, lenders will want to know how much money you are taking out of your business. The way they do this will differ, depending on whether you’re a limited company, sole trader or partner.
Lenders will look at how much salary and dividends you have paid yourself over the last two or three tax years.
For example: imagine your company has made £100,000 of profit and you have paid yourself £10,000 of salary and £20,000 of dividends. The company has made more money than you have taken out, but generally speaking, you will only be assessed on the £30,000. This is because although you have rights to the rest of the money, it hasn’t been pulled out of the company or declared to HMRC.
Lenders will look at your ‘net profit’ from the last two or three tax years.
Lenders will look at your ‘share of net profit’ from the last two or three tax years.
What documents do lenders need?
Lenders will want to look at your SA302, otherwise known as a tax calculation. If you do your own self-assessment online, you can print this off from HMRC’s portal. On the other hand, if your accountant does this for you, you need to request the document from them.
The SA302 shows what you’re declaring to HMRC by way of salary, dividends, net profit or share of net profit.
Mortgage lenders will also want to see your tax year overview document from HMRC. This shows the tax you owed in a tax year, and the tax you paid. Essentially, it confirms that you are up to date with your HMRC tax account.
In other words, the first document confirms what your income was and what tax was due; the second then shows that you paid that tax. Lenders will want to see both, to prove that you haven’t dodged paying any tax, as well as to verify what you have declared to HMRC.
Limited companies – a common misunderstandingWhen it comes to declaring income for a limited company, there can be a lot of confusion – one of the biggest being the treatment of a director’s loan. Here’s why: when someone sets up their company, they will often lend it money. When they take that money out of their company it isn’t salary or dividends, it’s the repayment of a director’s Loan. This is not income and it will not appear on your SA302.
We will often see people in this scenario. Let’s say that you’ve taken £50,000 out of your limited company and you think of this as income to you. However, on your SA302, the amount will be £0. How is this possible? Because the £50,000 was actually a repayment of your initial director’s Loan to the company.
What criteria will lenders want you to meet?
Lending criteria will differ from provider to provider. There are numerous quirks that we frequently see with self-employed mortgage applicants – some lenders will work around these, while others will not.
Two-year trading history
Normally, lenders will want to see a minimum of two years’ trading. The problem is, not everyone will have this, and there could be good reason for that. If this is the case, some lenders will accept one year’s trading, although this is rare. Others, if you have traded for two years, will take an average of the last two years. Others will look at the most recent year.
Change of trading style
It could also be that someone has recently changed from being a sole trader to a limited company. For example, you’ve been a sole trader for five years, but changed to a limited company nine months ago; you will not have two years’ trading but in some circumstances, you would be able to argue continuity of trade. The underwriter would need proof that you’ve been in the same business for nearly six years, you have simply changed the trading style and so effectively, you do have two years’ trading history. Some lenders might make an exception – this is where a skilled broker is needed, to help you navigate such pitfalls and find a suitable lender!
So, you work in the family business… so what? You are employed and own 20% of shares and your family own the remaining 80%, surely this cannot be an issue? Well, it could be a problem if lenders suspect that you don’t actually have a real job! Maybe your family has just given you what looks like a job, in order for you to secure a holiday let mortgage.
If you own shares but don’t have a proper role in the company, it raises suspicions that your family has handed over shares, simply as a method of providing cash. Lenders don’t like this as it hints that the applicant can’t stand on their own two feet and the only money coming in is ‘investment income’ and not ‘earned income’.
When it comes to working for the family business, it would be common practice for lenders to run a search on the company in question, so it’s best to be upfront about it. In most cases, the concerns can be solved by asking your company’s accountant to verify what your job actually is, how long you have been employed, what you earn, and so on.
This is a complex issue that arises more frequently than you might think! Let’s look at a case study: someone has a limited company which sells clothing online and has been in business for six years. On paper, you’d think this was a simple application. However, after looking at the applicant’s SA302s for the last two tax years, it is found that there’s actually more than one company. There are three, all of which have started and stopped at various times, and the income earned in each tax year actually comes from multiple sources.
What has happened is, the person in question started one company and then, after a couple of years, realised she should be doing something differently, still related to clothing. So, she set up a second company but this time, went 50-50 with a friend. Once things started going well, she set up a third company to sell in just her own name.
In this instance if the case was not presented correctly, lenders would most likely dismiss the applicant as not having enough trading history; saying that they can only take one job.
In situations like this, it is HCM’s job to break everything down. In each tax year, we have to look at salaries and dividends and ask the question, ‘Who’s paid you that?’ We then have to tie everything together in order to bypass the rule that says the company has to have been trading for two years. Though the case presents as multiple jobs, we will argue that it’s really one continuous trade.
A similar problem can arise when it comes to sole traders. Technically speaking, you could be a sole trader as a plumber, as well as a sole trader as an electrician, and a sole trader as a web designer. In this case, lenders would look at the applicant very sceptically because they will want to know how they could possibly manage all these jobs. The key here would be to demonstrate how much time is allocated to each job and prove that you have the time to do all this work. Again, all the application needs is careful consideration and presentation to the lender.
How can HCM help you?
With our expert understanding of the holiday let market and mortgage lenders, we have the ability to arrange holiday cottage mortgages on your behalf. We know how to deal with the various scenarios when it comes to self-employed people applying for a holiday let mortgage. It’s surprisingly technical and for this reason, we’d always advise getting a professional to help you navigate the various difficulties that you’re likely to encounter.
If you are self-employed and hoping to purchase a holiday let, contact us or create an account and request your free, initial assessment, here.