Lenders look at your taxable income to calculate your mortgage amount. Usually, the higher the income, the more you can borrow. When your accountant is good at deducting business costs, your overall profit and therefore your taxable income is reduced.
That smaller income on paper could result in less borrowing power for you.
So, is there a way to be tax efficient but still get a mortgage to buy a property?
Yes. We’ve helped real people successfully obtain a mortgage despite having a lower taxable income.
Never assume you won’t get a mortgage when you’re self-employed
That couldn’t be further from the truth.
If you’ve opted to go self-employed for the flexibility and freedom that it can offer, you may be having a hard time meeting strict lending criteria and affordability checks, even when your business is on the up.
If you’ve used the expertise of an accountant for tax purposes, your choice of lender could be reduced if your income is drastically reduced as lenders like to see larger incomes that are stable.
Tax returns that evidence fluctuating income or a significant drop in income don’t scream stability and that’s where problems arise if you don’t have help from a professional.
While your tax return might evidence a larger income in 2021, if your income in 2022 is significantly lower, a lender might query whether your income is sustainable.
How do accountants save business owners money?
It’s not uncommon for company directors, sole traders, freelancers and self-employed contractors to reduce their income for tax efficiency. A chartered accountant can work with you to make your money grow and they do that by:
Helping you obtain loans if you are entitled to financial support
Meeting deadlines so you avoid fines and penalties from HMRC
Maximising the tax deductions you’re entitled to
That may be great for your business but that could result in your income appearing less established than it is. In the eyes of most mortgage lenders, a smaller income results in a smaller loan.
Is a tax saving worth it if you want to buy property?
According to a survey conducted by the Federation of Small Businesses (FSB), small business owners who hired an accountant saved an average of £5,160 per year on tax.
While that can be advantageous, it can reduce the amount that you qualify to borrow on a mortgage.
Lenders use income multiples starting at 4 to calculate the maximum mortgage amount a person can apply for.
Hypothetically, a freelancer earning £30,000 a year might qualify for 4 x that amount for a mortgage of £120,000.
However, if they were to save £5,160 via an accountant’s assistance, that final mortgage loan could be reduced to just £99,360. That difference could result in the freelancer missing out on their chosen property unless they can find additional funds elsewhere and put it down as a deposit.
Should I ask my accountant to hold off on reductions to maximise income?
Possibly but the crucial thing we want to communicate is that every case is different. On top of that, every lender has different rules about how they calculate affordability for a mortgage.
Some require a minimum of two year’s worth of accounts so they can calculate an average whereas others will accept just a year’s worth of recent accounts.
You may be in a position now to apply whereas for others, holding off until they have another year's worth of accounts may be advisable.
Talk to a mortgage professional about the current mortgage criteria for the type of mortgage you need and inform your accountant about your plans to buy a home.
Options are available
We have access to over 90 lenders and 12,000 products and we’re confident we can help you.
Finding a lender that accepts your income and allows you to include pre-tax income or from retained profits, salary plus dividends, shares or company profits, could be the solution.
There are also lenders that will accept loans from your business when calculating the final mortgage amount.
If you have additional collateral or security, foreign income streams are available or you have secured contracts which indicate future profitability, some lenders may also be prepared to offer preferential rates.
Having a low income doesn’t exclude you from homeownership and getting expert advice can help you find a lender to accept you quicker versus searching alone.
How can I get a mortgage with a reduced income for tax purposes?
Present your accounts clearly
If you file your tax through self-assessment, make sure you keep your form SA302 handy, together with a copy of your accounts.
Make sure there are no errors or incorrect information.
Some lenders require accounts to be signed off by a registered accountant.
Find out how lenders view your income in advance
You might be able to include other forms of income within the lender’s income calculations. Perhaps you have a side project, a part-time job or income from an investment or pension. Some lenders, though certainly not all, will include more than one stream of income on an application and that could help you borrow more.
Ask a mortgage broker to find you a lender
They can find you the ones you’re eligible to apply for so you don't waste time scrolling through a long list of lenders that you don’t qualify for.
Mortgage lenders have products specifically for self-employed workers and company directors and our brokers can point them out, highlighting the pros and cons for each so you know which one can offer you a higher amount or better terms that fit in with what you need.
We work with specialist lenders, plus familiar banks and building societies from across the UK. We put forward a positive case that is designed to secure approval.
What happens if I’m rejected for a mortgage because of my income?
If one bank says no, it just means they’re not suitable for you. Find a better lender for you elsewhere with a broker.
The Mortgage Hut can find you a lender with criteria that you’re likely to meet. There’s no guessing whether you’ll be approved - the process is straightforward with updates that keep you in the loop but don’t consume your time.
The Mortgage Hut is rated excellent on Google
Self-employed mortgages are a speciality for us and we’ve helped thousands of people successfully secure the mortgage they need to buy a property.
WhatsApp us if you have questions and someone will reply as soon as they can with further information. We also have a quick contact form here if you’d prefer or you’re welcome to call us on 023 8098 0304.
*This content is not financial advice and has been written based on current UK tax laws at the time of publication. For advice about finding a mortgage with your specific circumstances, seek advice from a mortgage broker who can explain any changes to tax law that may affect you.