Reply to: Getting a Mortgage with reduced salary?

[RichardCranium]

Mortgages for IT contractors with limited companies

How many multi-year-old threads do you intend to resurrect just so you can keep ming us?

[SueEllen]

It would be far easier for Amar to get a mortgage while he is still with the Umbrella company as he would have a very limited choice of lenders that would lend to him under a limited company.

Sometimes it's better for people to do their own leg work then giving them the precise answer.

[Freelancer Financials]

I would see which one you can get the lower interest rate for definite then decide what to do.

It would be far easier for Amar to get a mortgage while he is still with the Umbrella company as he would have a very limited choice of lenders that would lend to him under a limited company. Most high street lenders want at least 1 to 2 years of self-employement history through a limited company. If he is currently dealing with Halifax through a specialit mortgage broker then that is probably his best strategy for getting a mortgage based on his current situation. However, he will not get more than 4.5 times he declared salary from the umbrella, which is quite good.

[SueEllen]

I can see two possibilities,

1) Get the mortgage while i am employed with the umbrella company that would get me the £250k though i dont need that much. Then form the ltd company.


2) Find out how much i will be entitled to with a ltd company.

I am going to give contractor money a call.

I would see which one you can get the lower interest rate for definite then decide what to do.

[Freelancer Financials]

Mortgages for Contractors with limited companies

Mortgages for IT contractors with limited companies

For IT contractors, setting-up a limited company is often the most tax efficient method of paying yourself (if operating outside of IR35).

If you have a capable savvy accountant who is doing his job correctly then it could actually be more difficult to obtain a mortgage. He would probably have advised you to withdraw profit from your company using tax efficient means such as dividends or company loans. You might even retain excess profits within your company protecting you from higher rate personal tax.

However this means you often cannot show a substantial salary and as a result mortgage lenders will be reluctant to give you a mortgage. This is because most lenders have a simplistic view of what qualifies as relevant earnings for lending purposes. Contractors working through a limited company are assessed on salary and dividend drawings. As you’re probably well aware, for tax reasons, many contractors working through a limited company will draw a minimum salary and also restrict dividend payments to avoid higher rate tax. Although this is a perfectly reasonable tax planning strategy it also has the unintended consequence of reducing the amount a contractor is eligible to borrow under the standard criteria used by most mortgage lenders.

This is why it is often better to seek the advice of specialist mortgage brokers who know how to best package a mortgage application to senior underwriters. If your salary and dividend drawings do not reflect your potential earnings a mortgage specialist can present an annualised multiple of your current contract rate.

An example of the use of contract rate rather than salary and dividends might be: Daily contract rate of £400 on a 3 to 6 month rolling basis, would offer a potential mortgage income annualised over a 48 week year to be £400 x 5 x 48 = £96,000. Each lender will have their own criteria for determining relevant earnings and will apply a multiple of 3.5 to 4.5 times this figure. This will be subject to your credit score and any other financial commitments you have.

With regards to borrowing a multiple of 5.5 x your salary (relevant earnings), that doesn't sound right. The maximum multiple Halifax offers is 4.5 and that is subject to a high credit score and low expenditure commitments. The average multiple is 3.5 x annual earnings from high street lenders.

[Amar]

I can see two possibilities,

1) Get the mortgage while i am employed with the umbrella company that would get me the £250k though i dont need that much. Then form the ltd company.

2) Find out how much i will be entitled to with a ltd company.

I am going to give contractor money a call.

[Turion]

What difference does it make? You say you've already secured the 250k.

[TheFaQQer]

The question was whether forming a limited company where my income on paper would be less than what i would actually make matter?

You've already got an offer of 5.5x salary, so take it quickly while it's on offer.

[TheFaQQer]

The 2000-2007 boom times will be back : around 2020-2027.....

Around the time that TPD runs out, then?

[Amar]

Ok firstly this i am trying to buy a family house not an investment property and the mortgage is not interest only. I already have one but its a small property. It is mortgage free. Now, the way i see it is that i dont need to sell the current property at this time given the property prices. However if in future i cannot keep up with the mortgage payments, then selling the previous property would be an option.

The question was whether forming a limited company where my income on paper would be less than what i would actually matter?

[BrilloPad]

WHS

To me this OP seems to be living in 2000-7 cloud cuckoo land. Things are totally different now and just about every assumption any govt, business or individual has made has been blown apart.

He is betting all on property, by not selling his existing house to reduce that massive mortgage requirement for the lifestyle property he wants now, but cannot afford. Bet the 5.5x mortgage is interest only.

As for rentals, these have plunged since September, that's if a tenant is available. Your assumptions and finances are built on sand mate.

The 2000-2007 boom times will be back : around 2020-2027.....

[TheFaQQer]

Bet the 5.5x mortgage is interest only.

These days, you need to prove how you are going to repay the mortgage as well, even if it's interest only - whether that's inheritance, other properties, share portfolio, pension pot etc. etc.

I'm amazed that anywhere is offering 5.5x anyway.

[Turion]

There are some big assumptions in there..

Mainly - you can rent your other property and will get the rent you want also you're assuming that home owners will be able to "hold onto thier property" as opposed to letting the banks repossess it.

WHS

To me this OP seems to be living in 2000-7 cloud cuckoo land. Things are totally different now and just about every assumption any govt, business or individual has made has been blown apart.

He is betting all on property, by not selling his existing house to reduce that massive mortgage requirement for the lifestyle property he wants now, but cannot afford. Bet the 5.5x mortgage is interest only.

As for rentals, these have plunged since September, that's if a tenant is available. Your assumptions and finances are built on sand mate.

[TheFaQQer]

Thanks for the posts guys, I been offered (5.5* salary) mortgage by Halifax. I see your point but i can pay back the money. I dont have any debts and have access to another property which will be rented to pay toward the mortgage for new property. I could keep up with mortgage payments without working for a year atleast using the rent from other property and savings.There is no point in saving money in banks as there is hardly any interest and even then the tax on savings kills off any benefit from it.

While house prices are falling, properties still are worth investing in. The house i am going for needs some repairs but it is well worth the money. If i get it for the price i want, it will be a great deal.People have seen how high the house prices went, so as an owner if the prices go down too much the owners just will hold on to their properties. So i think its best to get a good deal on a house that i want now than later on get no deal.

5.5 * salary, based on what you are earning at the moment on a contract. And the banks wonder why they got into the mess in the first place

Can you keep up the mortgage payments with £0 income, though? That's the key question - if the client terminates the contract, and your tenants move out, how long can you make the repayments for and still live?

Mind you, since the second property is mortgage free (or else you wouldn't be able to divert the rental income to repay your second house), then you may get away with it.

I can't understand the perceived wisdom of borrowing such a large multiple, though, it has to be said. I remember struggling to make the payments on my first mortgage which was 3x salary, because I had so many other expenses to pay that I hadn't considered.

[Sockpuppet]

Thanks for the posts guys, I been offered (5.5* salary) mortgage by Halifax. I see your point but i can pay back the money. I dont have any debts and have access to another property which will be rented to pay toward the mortgage for new property. I could keep up with mortgage payments without working for a year atleast using the rent from other property and savings.There is no point in saving money in banks as there is hardly any interest and even then the tax on savings kills off any benefit from it.

While house prices are falling, properties still are worth investing in. The house i am going for needs some repairs but it is well worth the money. If i get it for the price i want, it will be a great deal.People have seen how high the house prices went, so as an owner if the prices go down too much the owners just will hold on to their properties. So i think its best to get a good deal on a house that i want now than later on get no deal.

There are some big assumptions in there..

Mainly - you can rent your other property and will get the rent you want also you're assuming that home owners will be able to "hold onto thier property" as opposed to letting the banks repossess it.