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Not a week goes by at Enness without receiving a distressed phone call from a newly self-employed client, struggling to raise the requisite finance to buy that dream home or release some equity from their property. The line I hear more than any other is “my bank doesn’t understand my income”. Now this may very well ring true with you and you may have found yourself having that very conversation with your bank and receiving a very close variant of, or the same, answer.
This has become a problem across the residential mortgage market, or at least created the perception that there is a general malaise among self-employed borrowers not receiving the same amount as their employed friends and family. What’s more, when they approach me, they no longer seem frustrated, but almost accepting of their fate, calling me more in hope than expectation.
However, this does not have to be the case. The good news is, the limitations placed on self-employed clients stems from banks’ inflexible and standardised approach to assessing income. Specifically, most will look only at a director’s salary combined with dividends taken over a 3-year period. They will then simply average this figure to produce a notional income.
At Enness, we understand that self-employed clients running successful businesses often vary the income they draw for a multitude of reasons. Mainstream banks fail to grasp that taking less out of your business doesn’t equate to a company struggling or going in the wrong direction. Many clients simply don’t need to draw a large income and prefer to keep more in their company to keep the personal tax liability low. Others haven’t been trading for the requisite of 3 years or may have had, at least on paper, a weaker year in their recent history, significantly affecting them when it comes to the standard ” 3-year average” rule that most banks use.
The key to getting the most borrowing from your business is who you approach. We have access to numerous private and specialist banks, who will look at net profits of the business rather than what you draw as income. Whereas other lenders will focus solely on the last year’s performance, if other recent years perhaps haven’t been so strong.
These are just two of the common alternative assessments of income out there but of course, there are many more. We are able to put your case to underwriters directly who have the freedom to make a sensible, common-sense lending decision, instead of just following what the computer says.