If you’re self-employed or a small business owner, you’re probably already familiar with the ongoing challenges of keeping your accounts, finances, and income all in order. You’ll often be wearing a lot of different hats in your day-to-day operation and working longer hours than an employee. So, applying for a mortgage, may seem daunting.
Unlike traditional salaried employees, those who are self-employed, will face unique challenges when it comes to securing a mortgage.
Proving your income
The most critical aspect that banks consider as part of your mortgage application, is proof of income and consistency of this income each year so that you can cover your mortgage repayments.
For self-employed individuals, this proof of income is from your detailed annual financial statements. These financial statements will show income that you’ve paid tax on.
Banks understand that income can vary throughout the year, so generally, they’ll need to see two full years of financial statements to show income and consistency.
These financials should include:
- Balance Sheet – shows what your business’s financial position is at a moment in time (usually 31st March being the end of the tax year)
- Profit & Loss Statement – shows financial performance during the financial year
- Cash Flow Statement – shows record of month coming and going during the financial year. This provides insights into seasonal patterns and/or cash flow problems
Talking to an experienced Accountant or Tax Professional about working out your taxable income could play an important role in your mortgage application. They will also be able to help prepare the necessary documents to satisfy the bank.
Consistency in income
Lenders like to see consistency in your income. Generally, banks need to see your most recent two years of Financial Statements. Some banks may average out your income over the last two years, while others might focus on the most recent year or the year where you’ve earnt the lowest income over the last two years.
It’s crucial to have detailed discussions with your Accountant to ensure your financials are prepared in a way that is most likely to support your mortgage application.
Improving your cash flow
Making the most of your cash flow can be beneficial for those who are self-employed. Paying off any outstanding debts such as credit cards or vehicle loans could positively impact your cash flow.
Strengthening your application
Some key things you can do to strengthen your application as a self-employed individual include:
- Having separate business and personal accounts
- Keep accurate financial records of business income
- Keep up to date with your IRD obligations
- Demonstrate regular savings
Want to find out more?
Not all banks assess self-employed income the same way, so if you’re considering purchasing a property and you’re self-employed, we recommend you seek help from our of our experienced Mortgage Advisers
