How do I ensure my rental profits count towards a residential mortgage multiple?

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    How do I ensure my rental profits count towards a residential mortgage multiple?

    In about three years' time I will want to take out a new residential mortgage, and I would like my rental profits to count as income in addition to my salary in order to maximise the amount I can borrow. I know that different lenders have different attitudes as to the extent to which they allow this, but my question is not related to that point. Instead, I would like to know how to ensure in advance that my stated profits are presented in such a way that they are acceptable to the majority of those lenders who do take rental profit into account, and how to (lawfully!) maximise the figure which will be taken into account.

    The situation is perhaps complicated by the fact that I own some properties in my own name and some via a company. Here goes with my questions:

    Properties held in my own name:
    • I understand that most lenders only look at the previous two years of rental profits and use whichever is the lower of the two, so only my 2019/20 and 2020/21 tax years will be relevant here. Is that understanding correct?
    • I understand that lenders will use the declared rental profit on my SA302, which is fine. However, I have also seen at least one lender require an accountant's certificate on top of the SA302. Is this a common requirement? I have never used an accountant for my self-assessment and would prefer not to in future (I actually find it much simpler to do it myself than to explain everything to someone else, and I am confident that I have a good grasp of income tax principles), but do I need to engage one for the 2019/20 and 2020/21 tax years solely in order to have someone who can provide me with an accountant's certificate to give to a mortgage lender in three years' time? Or would an accountant be willing to provide this certificate retrospectively even if they hadn't prepared the accounts? (I suspect the answer to the latter question may be "no")
    • Are there any other considerations I'm missing?
    Properties held in my company:
    • I hold some properties in a company of which I'm both sole director and sole shareholder.
    • I suspect that this company will declare a loss for the next three years, as although it has a healthy monthly cashflow I have taken a strategic decision to front-load various major maintenance works on the properties it has bought (and I will probably continue to do this when I add properties), and I have also had various other start-up costs.
    • I am assuming that given that my company will continue to declare a loss it will not be possible to use its revenues to boost any mortgage multiple, despite the healthy monthly cashflow. Is that correct? Or could I pay myself a salary as director over 2019/20 and 2020/21 which would count towards a mortgage multiple, even though the company's making a loss? (I am guessing the answer to this is "no" as it'd be too circular: the director's salary would, in part, be covered by my director's loans to the company!)
      • Just for my understanding, say hypothetically my company did make a profit,would I have to pay that profit to myself as either a director's salary or as dividends in each of 2019/20 and 2020/21 for it to count towards my mortgage multiple? Or -- given that I'm sole shareholder and sole director -- could it count even if it were retained by the company?
    • Conversely, could the fact that my company has consistently declared a loss count against me more widely in terms of getting a residential mortgage (given that I personally guarantee all of my company's mortgages)?
    • Are there any other considerations I'm missing?
    Sorry, that was rather long! Grateful for any thoughts.

    #2
    Hi JamesHopefull
    You have raised an interesting question and one that is difficult to explain given that in the majority of instances lenders are invariably governed by “What does he Computer Say” and find it very difficult to comprehend the nature of carried forward losses on Tax Returns believing incorrectly that the portfolio is loss making even though the plain fact shows that the monies have been spent and as such being offset against current income and potentially over the next one or more years until the losses have been expunged from the Tax Calculations.
    Presently there are at least 43 lenders who declare a willingness to consider declared rental income beit from mortgaged or unencumbered properties, unfortunately there are a few of the primary lenders who are missing from my updated systems on this matter.
    To progress the question of “How much can I borrow for a primary residential mortgage, it might be best by asking your mortgage broker, if indeed you have one to discuss the relevant facts behind your residential portfolio including those held in a corporate entity with the local sales managers whom I would expect to ask for a detailed submission to be made in order that the proposition could be placed before a senior mortgage mandate holder thereby bypassing the dreaded responses which invariable emanate from lenders systems when a Decision in Principle is submitted, even if it is referred , the case might not reach the person who can look beyond the normal 2+2 = ??

    Nothing can be guaranteed but I really do believe that common sense can prevail when applications have to take account of validated rental income and notto be penalised because such investment might have resulted in what I consider to be technical losses and as such do not mirror the true performance of the portfolio combined with income from the applicants primary source of remuneration.

    I hope that this might go some way to helping you in your quest for answers to a matter often raised by professional investors and on occasions even those with only three or four performing properties.

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      #3
      loanarranger,

      Thank you very much for your reply.

      Thinking about it further in the light of what you have said, for all that my company has a positive cashflow each month I will not be overly hopeful that a lender will be willing to look past the declared loss to allow my company's revenues to assist in the amount I can borrow in my own name on a residential mortgage. In addition, there is not much I can do now to improve this situation at the moment, regardless of what lenders' attitudes are! It would still however be interesting for its own sake to understand further how lenders do view this sort of thing.

      If anyone has any insight as to the accountant's certificate question in relation to my personal income I'd be very grateful.

      Comment


        #4
        If you look at the situation from lender's point of view ,

        Criteria for offering loans :

        1. They want to offer loans which are covered by taking the residential property as security for the loan . So they would prefer the loan to be not more than 50% of market value. When the loan is over 50%, the risk to lender is higher than risk to borrower .

        2. For BTL property, they apply the rental test which roughly means the gross rent has to cover 1.5 times the "interest only" loan calculated at 5.5% int. rate.

        3. For leasehold flats, not accepting lease term fallen below 70 years.

        Criteria for Borrowers.

        4. Mortgage loan for own residence up to about 4 x annual income.

        5. Proof of earnings for employee is based on employer declaring your annual job income.

        6. Proof of income for self -employed is certified by accountant doing your trading accounts ( asking for 2-3 years accounts ).

        The lender's is looking to a 3rd party to confirm your annual income and not willing to accept annual income self declared by the borrower .

        Comment

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