Typically, self employed people wishing to obtain a mortgage require at least 2 years worth of accounts or, very solid business projections with an accountant’s letter or certificate.

Small business owners who are the only director of their limited company are also considered self employed for mortgage purposes.

Historically, to calculate how much an applicant can afford, mortgage lenders will use an average of the last 2 years figures and depending on the lender the figures will consist of:

Salary + Dividends

or

Net Profit + Salary

However if the net profit of the business has declined in the last year, lenders will only consider the most recent year’s figures instead of an average of the previous 2.

Looking at this with examples:

2007 – 2008  – Net Profit – £40,000 + Salary £6000 = £46,000

2008 – 2009 – Net Profit – £45,000 + Salary £6000 = £51,000

Rising profits.

In the above instance the lender will use the average (£46,000 + £51,000)/2 = £48,500

If they then use 4x income to calculate the maximum borrowing this would be £218,250

But if the net profit has reduced:

2007 – 2008 – Net Profit – £40,000 + Salary £6000 = £46,000

2008 – 2009 – Net Profit – £38,000 + Salary £6000 = £44,000

Using the lower figure only, 4x £44,000 = £176,000

£42,250 less.

Bang goes the idea of moving to a new/bigger/nicer house…

In 2008 – 2009 a lot of small businesses suffered and are continuing to feel the effects of the recession.

The owners of very robust small businesses, who will survive despite the down-turn, are finding themselves unable to switch mortgage lender because they simply can’t borrow enough at the moment.

Their existing lender will probably allow them to switch to a new offer but any additional borrowing that is subject to an affordability review may well be declined and, if applied for, highlight and create a potential problem for the lender regarding the mortgage as a whole.

Another handy knock on effect of the financial crisis/recession that is contributing to the marginal recovery(?) of the housing market.

Good luck to all small businesses for the remainder of 2010 and beyond…