Kensington Mortgages is launching a new policy for self-employed customers with affordability criteria in mind.
The scheme, launched on 22 June, takes into consideration a company director’s share of net profits in addition to their salary. It is designed to reflect the true earnings of self-employed entrepreneurs who choose to keep part of their profits in the business rather than taking it out as personal income.
It is common practice for many small business owners to take only the salary they need in order to be tax efficient. But while leaving profit in their business is a good way to strengthen the balance sheet of their company, it can also reduce their chance of getting a mortgage. The vast majority of lenders will only consider salary and dividends when assessing the affordability of self-employed customers.
This is why so many self-employed struggle to provide proof of their income. Kensington research has found that 37 per cent of the self-employed are not able to provide information about their true earnings, compared to only 3 per cent of the employed.
There are 4.5 million self-employed in the UK market who are having hard time getting mortgages due to restrictions on lending to borrowers who are not in full-time employment.
How it works
In the example below we assume a sole company director who chooses to take a salary of £10,000 (paid from the Administrative expenses) and dividends of £40,000
| Turnover | £150000 |
| Administrative expenses | (£35000) |
| Operating profit | £115000 |
| Profit on ordinary activities before tax | £115000 |
| Tax on profit | (£21000) |
| Profit for the financial year | £94000 |
| Dividends paid | (£40000) |
| Profit after Dividends | £54000 |
By considering profit as well as salary, Kensington would be able to base its affordability assessment on both the salary taken by the customer and the company profit for the financial year.
Salary: £10,000
Profit for the financial year: £94,000
Income Kensington could use for affordability: £104,000
Keith Street, head of Kensington, commented:
“In 2009 Kensington launched an approach to self-employed lending based on reviewing the last 12 months accounts, which meant that entrepreneurs no longer had to wait for three years to get a mortgage.
“But we know that there is more we can do to help customers in this vital sector. We recognise that for many directors of small companies, salary and dividends on their own are not a true reflection of their income and affordability. Which is why we can now make affordability assessments taking into consideration a company director’s share of profits in addition to their salary.
“This is a significant step in the way we approach lending to the self-employed and it is just one of the ways that Kensington is reacting to the shifting employment trends amongst our customers to ensure we are able to make responsible decisions without penalising those customers who do not fit a standard mould.“
David Hollingworth, associate director of communications at London & Country Mortgages, said:
“Self employed homeowners have been hit by tougher lending rules in recent years and can struggle to meet rigid income proof requirements. It’s therefore crucial that lenders continue to evolve their approach to provide more flexible solutions to self employed borrowers.”
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