Mortgage- Perm to Self employed, less than 6months worth of

[Henry Fiddleton]

Hi All,

Well where do I start- the facts I guess.

House £265,000
We had an initial deposit of 5% (£13k)
Mortgage is £252,000.

Current mortgage is with Bank of Ireland, which was fixed for 3 years, and we are due to come off the fixed term on 31/12/2011 down to SVR of 2.99%.

I was permanent employee for 18months up to June 2011 (from Feb 2010), and my wife is still permanent- we have never missed a payment and generally in healthy finances. The combined salary when I was permanent was way more than the qualifying criteria for the mortgage to get my FiL off the mortgage, but there was a penalty fee. So we decided to wait under the end of the fixed term.

HOWEVER- I have gone self employed in the last 2 months. Its going fine and I have a 6 month contract, with another 6month contract pushed under my nose already. My salary though is £11k, and the rest is in dividends!
My FiL wants to be off the mortgage as well, and rightly so.
BoI will not mortgage me without 3 years of accounts, and my salary and my wife’s salary combined is still below the qualifying criteria.
I should be able to get around another 10-15% deposit in the next 6months.
However, I have been looking at the option for self employed mortgages and most want 12-36months worth of accounts!
What are my options?

(Wish I never went self employed for the mortgage, but I should have enough money in the next 6 months to get a decent mortgage!).

Thanks HF

[996c2]

Henry Fiddleton said:

Hi All,

Well where do I start- the facts I guess.

House £265,000
We had an initial deposit of 5% (£13k)
Mortgage is £252,000.

Current mortgage is with Bank of Ireland, which was fixed for 3 years, and we are due to come off the fixed term on 31/12/2011 down to SVR of 2.99%.

A rate of 2.99% SVR is very good and, if your FiL is OK with it, I would stick with this until your employment/financial situation is "better" in the eyes of the banks.

[LivingTheDream]

Speak to www.contractormoney.com

They'll be able to work from your contracts to secure decent mortgage options

[scotal]

So you bought in late 2008, which means the property is worth pretty much what you paid for it.
Your mortgage balalnce is 95% minus maybe a little bit.
You're recently self employed, although you have 6 month contracts. You have no track record though.
You are tied in until the end of December.

You drop onto a pretty decent SVR.

Your father in law is in there somewhere (guarantor? or party to the mortgage. Broadly speaking they are the same)

Right now you have preciely no options but to stick with what you have.


ETA: please tell me you didn't go unsupported i/o as well.

Edited by scotal on Tuesday 2nd August 12:45

[scotal]

LivingTheDream said:

Speak to www.contractormoney.com

They'll be able to work from your contracts to secure decent mortgage options

At 95% LTV? No.

[Eric Mc]

Are you really Self Employed or running a small limited company?

There is a difference.

[B160 AVE]

Can`t help with the mortgage unfortunately, but if you remove your FiL from the new mortgage, for gods sake make sure you get him removed from Land Registry also. I had this problem 3 years ago when I re-mortgaged with the Halifax, they found it (2 previous re-mortgages hadn`t) from when my Dad stood guarantor for me 15 years ago (he was taken off the next mortgage 2 years later).
It cost me hell of a lot of money and time and ballache

[Henry Fiddleton]

Thanks Chaps.

Yes we unfortunately went i/o- it was the only way we could afford it at the time. However, now that we have developed a bit in our careers, we are at stage where we can pump money into the property which is the plan for the next year, 10-15% is realistic.

We got the house very cheap, and even in this market it has probably made some equity; 5-10% tops.

Spoke to the Bank of Ireland- they wont even let me switch the equity holder(guarantor) which is my FiL. (transfer of equity).

Indeed 2.99% is astonishingly good- to get anywhere near that on an open market, by the looks of it, I will need another 15% equity. Had a chat with my IFA- he told me take the 2.99% SVR with both hands, and claimed BoI should have moved regarding the guarantor (happy to put my bro on it who earns more than enough salary wise).

Thanks for land registry advice- will keep that in mind.

Will have to bite the bullet, and have a chat with my FiL- not sure why he is so keen to get his name off the mortgage but its his call, financially we could really scrap it for a few months on my wife’s perm salary (her monthly inc covers both the mortgage and some costs).

BTW- yes, I work under my own Ltd Company, free lance contracting.

At least I can look forward to 2.99%!

Thanks,
HF

[LivingTheDream]

scotal said:

At 95% LTV? No.

Henry Fiddleton said:

...and we are due to come off the fixed term on 31/12/2011 down to SVR of 2.99%.

...So we decided to wait under the end of the fixed term.

...I should be able to get around another 10-15% deposit in the next 6months.

I sort of assumed there was extra deposit available

[Eric Mc]

You are not technically self employed then. There is a legal difference between running your own business as a self employed trader (properly known as a sole trader) and running a business through your own limited company.

Any mortgage or loan applications need to be made on the basis that you are a company director and shareholder of a limited company - not on the basis that you are "self employed".

Lenders are not always that clued up on the diference either - and confusion may therefore ensue.

[Henry Fiddleton]

Thanks Eric- I will have a chat with them again. However, from my last conversation, BoI's base line in their calculations was as simple as me and my wife must be at least 4.1x joint salary to be none guarantor/FiL named on mortgage.

As it stands we are 50k short- so I will have to get saving big time for the next 10 months!

[Eric Mc]

Make sure they and you understand what they mean by "salary". Many people in your position will draw a mixture of salary and dividends from the company - often with the emphasis being on dividends.
Make sure the lender understands your dividend/salary strategy.

Also make sure that they are aware of any salary sacrifice schemes your company might be involved in (bike to work, child care vouchers, pension etc etc) which could dilute your declared salary and thereby affect the resultant multiples they are using.

[scotal]

Eric Mc said:

You are not technically self employed then.

However if you are a sole shareholder you will be treated as self employed, requiring you to have at least one years accounts (lender dependent) For your guide a share holding of 205 will usually move you from employed to self employed in a lender's eyes.

If you are working on fixed term contracts, provided these have been renewd, and show signs of being renewed again then some lenderss will treat you the same as an employee.


OP. If you want to stick with an i/o mortgage you will either have to have a LTV of <75%, have a viable repayment vehicle in place, or in a very few cases go i/o to 75% then repayment for the remaining portion. Rocking up to most lenders and asking for an i/o loan of 80% will in the majority of cases earn you an immediate turndown.

Is it possible your F-i-l is looking to get finance of his own? If so, he may be unable to whilst he remains party to your mortgage.

[Henry Fiddleton]

Last call of the day to BoI- makes no difference if I am ltd, freelance or self employed.

FiL is offically classed as a sponsor and has no deed tie in or any connection with his property directly.

Thanks for all the help- its all been very useful, but BoI are not budging at all on this one. Will see what the future holds!

At least the USA has sorted its debt out until November....;)

Edited to add reply to above:

As soon as I get a rate of 2.99%, I am begining repayments- the amount repayed per month is still less than my current i/o fixed term rate (6.35%).

Very unlikey my FiL is looking for finance, he is relatively cash rich, and has a few properties. However, he does the odd part time shift (medical), and is looking to retire very soon. Could be a factor? He is risk averse by nature.

HF

Edited by Henry Fiddleton on Tuesday 2nd August 15:31

Edited by Henry Fiddleton on Tuesday 2nd August 15:40

[Eric Mc]

scotal said:

Eric Mc said:

You are not technically self employed then.

However if you are a sole shareholder you will be treated as self employed, requiring you to have at least one years accounts (lender dependent) For your guide a share holding of 205 will usually move you from employed to self employed in a lender's eyes.

If you are working on fixed term contracts, provided these have been renewd, and show signs of being renewed again then some lenderss will treat you the same as an employee.


OP. If you want to stick with an i/o mortgage you will either have to have a LTV of <75%, have a viable repayment vehicle in place, or in a very few cases go i/o to 75% then repayment for the remaining portion. Rocking up to most lenders and asking for an i/o loan of 80% will in the majority of cases earn you an immediate turndown.

Is it possible your F-i-l is looking to get finance of his own? If so, he may be unable to whilst he remains party to your mortgage.

But surely they can't be looking at the same things when evaluating the personal income for the individual?

A sole trader's personal income is the profit of his business.

The personal income of a director/shareholder will be a combination of his salary and dividends - plus perhaps some other extractions from the business such as company payments into a pension scheme. These amounts may bear no relationship whatsoever to the company profits in any given year.

So, are you saying that if a sole trader had a profit of £100,000, the lender would base their decision on the £100,000 but if the limited company had a profit of £100,000 but the director had personal income from the company of only £50,000, they would base the directors loan application on the company's £100,000 profit rather than the actual personal income?

Do lenders know the legal differences between limited companies and sole traders?
Should they ignore those legal differences when deciding how much to lend to a director?

[scotal]

Eric Mc said:

But surely they can't be looking at the same things when evaluating the personal income for the individual?

They won't treat them the same, but they will dig further into a directrs earning than they will a PAYE employee, director satatus or not.

Eric Mc said:

So, are you saying that if a sole trader had a profit of £100,000, the lender would base their decision on the £100,000 but if the limited company had a profit of £100,000 but the director had personal income from the company of only £50,000, they would base the directors loan application on the company's £100,000 profit rather than the actual personal income?

No they'd look to the accounts to prove the directors income, be it through salary or dividends. They might also ask for both business and personal bank statements. They won't take loan repayments and the like into account usually. From a broker's point of view, an accountant who's done really well for his client in minimising tax can actually ruin his chances of getting a mortgage.

Eric Mc said:

Do lenders know the legal differences between limited companies and sole traders?

I'm pretty sure some of them do. Equally others will read what it says in their big guide to underwriting and apply company lending criteria rigidly. Some lenders will even take the word of an accountant for what someone earns.... go figure.

Edited by scotal on Tuesday 2nd August 15:58

[Eric Mc]

So, they DON'T treat them the same as a sole trader - and that would be the correct approach.

When you are running your business through a limited company you are neither a sole trader nor are you an ordinary employee.

Anyone evaluating your personal income has to be fully aware of your status and examine all the correct criteria that suits whatever your status is.

My point was that being a director of a limited company was NOT the same as being self employed and therefore the lender has to take that director/shareholder status on board properly, and not evalauate your income on a simple "self-emplopyed" basis - which would be wrong.

[Eric Mc]

scotal said:

Eric Mc said:

But surely they can't be looking at the same things when evaluating the personal income for the individual?

They won't treat them the same, but they will dig further into a directrs earning than they will a PAYE employee, director satatus or not.

Eric Mc said:

So, are you saying that if a sole trader had a profit of £100,000, the lender would base their decision on the £100,000 but if the limited company had a profit of £100,000 but the director had personal income from the company of only £50,000, they would base the directors loan application on the company's £100,000 profit rather than the actual personal income?

No they'd look to the accounts to prove the directors income, be it through salary or dividends. They might also ask for both business and personal bank statements. They won't take loan repayments and the like into account usually. From a broker's point of view, an accountant who's done really well for his client in minimising tax can actually ruin his chances of getting a mortgage.

Eric Mc said:

Do lenders know the legal differences between limited companies and sole traders?

I'm pretty sure some of them do. Equally others will read what it says in their big guide to underwriting and apply company lending criteria rigidly. Some lenders will even take the word of an accountant for what someone earns.... go figure.

Edited by scotal on Tuesday 2nd August 15:58

Watching the "Saints and Scroungers" programme over the past few weeks, it is amazing how many housing benefit fraudsters obtained mortgages by putting one figure for income on their mortgage applications and another (much lower) figure for income on their housing benefit application forms - and nobody checked either.
No wonder the country has ended up in a mess.

[scotal]

Eric Mc said:

Anyone evaluating your personal income has to be fully aware of your status and examine all the correct criteria that suits whatever your status is.

We're still talking about the mortgage industry right? As authorised and regulated by the financial Services authority. How big a yeehah do you want from this particular collection of cowboys?

Eric Mc said:

My point was that being a director of a limited company was NOT the same as being self employed and therefore the lender has to take that director/shareholder status on board properly, and not evalauate your income on a simple "self-emplopyed" basis - which would be wrong.

Lifted straight from a lender's website

"A self employed applicant may be:

a sole trader
a partner in a business
a director that owns more than 20% of the company
If a client has more than a 20% share holding in the business they work for we will treat them as self employed and we require an accountant's certificate.

If a client has a 20% or less share holding, we will treat them as 'employed' and use their P60 and latest payslip to confirm income as appropriate.

If a client has a 20% or less share holding and P60 and payslip income is not enough to support the loan requested we will treat them as self employed, for example where we need to take account of any dividend income.

We will only accept an accountant's certificate where applicants have at least two full years' accounts.

If your client is an existing **** borrower and cannot meet the required criteria, please contact your service centre to see if the application can be referred to our senior underwriters.

Where your client has been self employed for less than two years, but is working as part of a business that has been established for longer, refer to your service centre to check if the application can be referred to our senior underwriters.

Accountant's certificate must be in our format and will be applied for by us, please supply the accountant's name and fax number."

Now it could be that the industry definition of self employed is broader than that of an accountant to make underwriting easier, but this is the way they do it (This is a large highstreet lender BTW not some specialist I've dragged out from under a rock

[scotal]

Eric Mc said:

it is amazing how many housing benefit mortgage fraudsters obtained mortgages by putting one figure for income on their mortgage applications and another (much lower) figure for income on their housing benefit application forms tax return - and nobody checked either.
No wonder the country has ended up in a mess.

Two words :- Self certification.