Getting a mortgage is exasperating at the best of times, but how do you go about it when you run a small business?
In Season Three of the ‘Everyday’s A Business School Day’ podcast, myself – Nicky Thomas (Founder of The Growth Community) – and my good friend, James Marriott (Podcast Expert and Founder of Sound Media), got stuck into some conversations with Vicky Probert from Honey Financial Solutions about how small business owners can navigate themselves through the tricky process of getting a mortgage.
The key message that came out of the discussion was about getting into the planning mindset – in the same way that you plan in your business. And the earlier you do it the easier the journey will be.
There was so much good stuff in the conversation we had with Vicky, that I decided to decant some of it into a Small Business Mortgage Ready Checklist which you can find below.
It’s definitely not a professional mortgage guide – and you shouldn’t take it as financial advice – but it’s a useful way to grab some of the practical things discussed if you don’t have time to listen to the podcast. Or you want to tick off some of the ideas to take away an work on.
Important Legal Stuff about mortgages
I absolutely do need to say that this does not constitute financial advice and you should definitely speak to a professional about your individual circumstances. Vicky also says that I must give you this official information:
A mortgage loan will be secured against your home or property.
Honey Financial Solutions Ltd is registered with the Data Protection Act 1998 Registration No. ZA779511 and is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 1015992 an Appointed Representative of TMG Direct Limited which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number: 786245 and registered with the Data Protection Act 1998 Registration No: ZA178200.
The Small Business Mortgage Ready Checklist (outputs from the Everyday’s A Business School Day Podcast)
If you’re a small business owner, freelancer or sole trader, getting a mortgage can feel like a bit of a minefield.
When you’re employed, you can generally hand over your payslips and employment details. When your income comes from your own business, there’s more to think about.
But that doesn’t mean a mortgage is out of reach.
In this episode of Everyday’s a Business School Day, Vicky Probert, a mortgage and protection adviser from Honey Financial Solutions, shares some thoughts about what small business owners should be thinking about if buying a property is on their radar.
Certainly the message that came out loud and clear was that:
“Preparation is definitely key.”
This checklist brings together some of the things Vicky suggested you think about before you get to the point of applying for a mortgage. BUT PLEASE NOTE: This resource reflects the conversation recorded for our podcast. It is intended as a starting point for questions and preparation, not as personal mortgage or financial advice. Individual circumstances and lender criteria will vary.
So let’s dive in…
1. Start Planning Early
One of the biggest misconceptions can be that you only need to think about your mortgage when you’re ready to start looking at actual houses.
Vicky makes it abundantly clear that you need to start thinking a lot earlier than that.
She explains that she has clients who start talking to her years before they’re actually ready to buy.
“You’re better off talking to somebody a year, two years, three years, five years before. I’ve had clients that I’ve been speaking to for five years. Because I’ve spoken to them, they’ve gone away and they know what deposit they want to save.”
You don’t to have everything worked out years in advance, but it’s a good idea to have time to understand your position, think about your plans and get the right people involved.
Start thinking about:
- When might you realistically want to buy?
- What sort of property are you thinking about?
- What deposit might you need?
- What can you afford?
- What does your business income currently look like?
- Have you talked to your accountant about your plans?
- Have you spoken to a mortgage adviser?
2. Understand how your business income may be assessed
This is where things can feel particularly confusing for small business owners.
Vicky explained that the way a lender looks at your income can depend on how you’re self-employed.
For example, if you’re a sole trader, lenders can look at your income using your tax calculations. Vicky says that while some lenders will look at one year’s income, the majority will look at an average of the last two years.
“The majority of lenders will look at the average of your last two years, but they average it. So, say if the first year tends to be lower, but the second year has increased, a lot of the lenders, because they want to mitigate that risk, they’ll leverage it out.”
If you’re a limited company owner, the picture can be different again.
Vicky explains that lenders can potentially look at personal income, but they can also look at the company’s earnings.
She gives the example of someone paying themselves a relatively small salary but whose company has consistently made a much higher net profit.
“Somebody might be paying themselves, say, £13,000 a year, and then get dividends. So personally, they might not look as though actually they’re earning that much money, but then for the last two years they may have consistently had a net profit of £80,000 each year.”
The important point is that one approach isn’t better than another. It’s that your business structure and financial circumstances need to be taken into consideration.#
Think about:
- Are you operating as a sole trader or a limited company?
- Do you have plans to change that in the near future?
- Do you know what your business numbers look like?
3. Talk to your accountant early
Your accountant can be an important part of your mortgage preparation.
Vicky’s advice is to make sure your accountant knows that buying a property is on your radar.
“Make sure that you make your accountant aware of what your plans are, that you’re looking to get a mortgage, because they can then plan out how you’re never going to avoid tax, and you’re always going to declare it how it needs to be. But sometimes there’s things as to how you can look at your income, that the accountants can set up in a realistic way for the lenders.”
This isn’t about avoiding tax or manipulating your figures. It’s about making sure your accountant understands your plans and that your financial affairs are being handled appropriately with those plans in mind. And they can advise you more strategically for mortgage purposes.
Vicky also talks about situations where a business owner’s profits have fallen because they’ve made significant purchases.
“It’s talking to the accountant as well… what would they say to a lender, ‘Yeah, the profits have dropped for this reason. It’s nothing to do with income’s dropped or anything like that. It’s just purchases or things that have been happening in the background.’
Things to consider:
- I’ve discussed significant planned purchases with my accountant
- My accountant understands my mortgage plan and we’ve discussed the way we’ll adminster the accounts to make it clearer for lenders
- I have thought about how I can explain changes in my profits
4. Check your credit file – and don’t leave it until the last minute
Vicky describes the credit file as one of the most important things to look at when preparing for a mortgage.
And there’s a very good reason for checking it early.
Information on your credit file is not always accurate.
Vicky tells the story of a client whose credit file incorrectly showed four months of missed gas and electricity payments.
“They’d misreported it. So it took a couple of months to get that amended. She had to fight her side of things and then they take time to update the credit files.”
That’s why her advice is not simply to check your credit file — but to check it early enough to do something about any problems you find.
She also points out that the three main credit reference agencies can hold different information.
“There’s three out there, Experian, Equifax, and TransUnion. Check all of them because they can all hold the same information or different information.”
Things to do:
- Check your credit file with the three main credit reference agencies
- Double check that the information is accurate
- Get help explaining it if you don’t fully understand it
- Get help if anything is not correct and needs appealing
5. Think carefully about business spending
This was one of the most interesting parts of our conversation.
As a business owner, you might naturally think that maximising your profits before applying for a mortgage is a smart move.
And sometimes, business decisions you make can affect the figures a lender sees.
But it’s not necessarily as simple as “higher profit = better mortgage”.
Vicky explains that lenders may sometimes take the circumstances behind a change in profits into account.
She gives the example of a client whose profits had fallen because they had built something for the business.
“I could talk to the lender and they were like, ‘Oh, actually, right. We’ll take that into consideration,’ as long as the accountant will agree to that.”
That’s why planning ahead and talking to your accountant is so beneficial.
Before making spending decisions think about these:
- Is this purchase essential for my business right now?
- Have I discussed it with my accountant (in line with my mortgage conversations)?
- Do I fully understand how it will effect my numbers on paper?
6. Be aware of personal borrowing for business purposes
There’s another issue that can catch self-employed people out.
Vicky explains that sometimes a new business owner may take out borrowing personally because the business doesn’t yet have an established credit history.
But that can look different from a lender’s perspective.
She gives the example of a business owner buying a van for the business but having the debt in their personal name.
“From a lender’s point of view, they’re checking a credit file and they can see… if Steve bought a van, and that’s not for him personally, but it’s for the business, but he’s got the debt in his own personal name, it’s coming out of the business. Sometimes lenders won’t class that as a business expense. It’s in your personal name, it’s your debt.”
Vicky explains that in some circumstances an accountant’s letter may help clarify the position, but that this depends on the lender.
So, this is another area where planning the decision with your accountant can be important.
Things to consider:
- Have you got any borrowing for your business in your personal name?
- Do you plans to do this in the near future?
- Do you understand how it will appear on your credit file?
- Have you discussed this with your accountant and looked at alternative options?
7. Don’t automatically assume your own bank is the best option
You might assume that your existing bank has an advantage because they’ve known you for years and can see your financial history.
Vicky says that’s not necessarily how it works.
“Going to your own bank is not always the best. They may end up being the best deal… but it’s not for the reasons that you’ve banked with them. But I would say… it just depends.”
Her point is that the fact you’ve been a loyal customer doesn’t automatically mean your bank will offer the most appropriate mortgage for your circumstances.
That’s why a professional mortgage advisor can be really beneficial, because they have knowledge of the market and lenders that you may not have even heard of. They also know what’s current, because mortgage deals come and go in line with the economy too.
Things to think about:
- Have you spoken to a mortgage broker and considered options across the mortgage landscape?
- Do you know what your existing bank would offer you?
8. Consider whether you want professional help
You can potentially arrange a mortgage yourself.
But Vicky explains that an adviser will look at more than simply the headline interest rate.
They may look at your credit file, your income, your deposit, your proof of identity and address, and whether there are any questions a lender might ask about your circumstances.
“Our job as an advisor is to look at, right, this is the jigsaw puzzle. Each of these pieces you have to put together and then you match that with a lender.”
And importantly, she points out that the cheapest-looking lender isn’t necessarily the one you can use.
“That lender might not be the cheapest one, but actually it’ll suit your circumstances. And actually, even though it might not be the cheapest, you might not be able to go to those other lenders anyway.”
Things to consider:
- Have a conversation with a couple of mortgage advisors and see who you feel comfortable working with. It’s a long journey so definitely worth getting the right person for you.
- Get a clear picture of what an advisor would need from you to work together
- Do you have the knowledge and time to get yourself the best mortgage opportunity?
9. Think beyond the mortgage itself
One of Vicky’s other important points was that getting a mortgage isn’t just about working out whether you can afford the monthly payment.
You also need to think about what happens if circumstances change.
“When you’re looking at your budget, don’t just look at it for the mortgage. You need to account for if things go wrong, how am I going to continue to pay for this mortgage?”
As a mortgage and protection adviser, Vicky also talks about protection insurance, including life insurance, critical illness and income protection.
She particularly highlights income protection for self-employed people because it can provide an income if you’re unable to work because of illness or injury.
“Income protection for self-employed people is essential. It will give you an income if you are not able to work.”
This is an area where your individual circumstances are particularly important, so speak to an appropriately qualified adviser about what may be suitable for you.
Your Small Business Mortgage-Ready Action Plan (Vicky’s Homework from the session)
- Check your credit file
- Arrange a meeting with your accountant to share your plans
- Get up close and personal with your business numbers
- Start thinking about your deposit and affordability
- Consider any significant business purchases or borrowing you have or are planning for
- Research and get some recommendations for a couple of mortgage advisors and see who fits with you
- Create a project plan and start the journey to buying your property
Listen to the full conversation
This article is based on Season Three, Episode Five of Every Day is a Business School Day, How to get a mortgage when you run a small business. Listen to the full podcast here
Frequently Asked Questions about Mortgages
Can I get a mortgage if I’m self-employed?
Yes, being self-employed doesn’t automatically prevent you from getting a mortgage. However, Vicky explains that lenders may assess self-employed income differently depending on your circumstances and how your business is structured.
If you’re a sole trader or run a limited company, the way your income is assessed may be different.
How far in advance should I start preparing for a mortgage?
Vicky’s advice is to start thinking about it well before you’re ready to buy.
She talks about clients she has worked with one, two, three and even five years before they were ready to purchase.
The earlier you start, the more time you have to understand your position, check your credit file, talk to your accountant and get your finances organised.
How is my income assessed if I’m self-employed?
It can depend on how your business is structured and the lender’s criteria.
Vicky explains that for sole traders, lenders may look at income from your accounts, with some lenders looking at one year’s income and many looking at an average over two years.
For limited company directors, lenders may potentially consider salary, dividends and/or the company’s profits.
The important thing is that lenders can have different criteria, so don’t assume that your experience will be the same as another business owner’s.
Should I talk to my accountant before applying for a mortgage?
Vicky strongly recommends making your accountant aware of your plans.
Your accountant can help you understand your business figures and discuss how your plans might fit alongside the way your business is run.
If you’re thinking about buying a property in the future, it’s worth having that conversation early rather than waiting until you’re ready to apply.
Should I check my credit file before applying?
Yes. Checking your credit file is one of the things Vicky particularly highlights.
She recommends checking all three main credit reference agencies because they can hold different information.
If you find something that isn’t correct, sorting it out can take time — so checking early gives you time to deal with any problems.
Which credit reference agencies should I check?
Vicky specifically mentions:
- Experian
- Equifax
- TransUnion
Her advice is to check all three because the information they hold can differ.
Could my business spending affect my mortgage application?
Potentially, and this is one of the reasons Vicky recommends planning ahead.
During the podcast, we discuss how significant business spending can affect your business figures. Vicky also explains that if profits have fallen because of particular business purchases or investments, there may be circumstances where this can be explained to a lender.
This is something to discuss with your accountant and mortgage adviser based on your own circumstances.
What if I have business borrowing in my personal name?
This is something Vicky says business owners should be aware of.
For example, a business owner might take out finance personally to purchase something for their business. From a lender’s perspective, that borrowing may appear as personal debt because it is in the individual’s name.
If you’re considering borrowing for your business, Vicky recommends discussing the situation with your accountant so you understand how it may affect your personal finances and credit file.
Should I just go to my existing bank?
Not necessarily.
Vicky explains that your existing bank may turn out to offer a suitable mortgage, but simply being an existing customer doesn’t automatically mean it will be the right option for your circumstances.
Different lenders have different criteria, which is one reason some people choose to speak to a mortgage adviser.
Do I need a mortgage adviser?
You don’t necessarily have to use an adviser, but Vicky explains that an adviser can look at your individual circumstances and consider which lenders’ criteria may be appropriate.
She describes this as putting together the different pieces of a jigsaw — your income, deposit, credit history and other circumstances — and matching them with a lender.
Whether you use an adviser is your decision, but if you do, make sure you’re dealing with someone appropriately qualified.
Is getting a mortgage just about proving I can afford the repayments?
Not necessarily.
Vicky also talks about thinking about what would happen if your circumstances changed and you were unable to work.
She discusses protection such as life insurance, critical illness cover and income protection as areas that business owners may want to consider.
The right options depend on your individual circumstances, so this is something to discuss with an appropriately qualified professional.
What’s the most important thing I can do if I’m thinking about getting a mortgage?
If there is one overall message from Vicky’s conversation, it’s start planning early.
Check your credit file, talk to your accountant, understand your business figures and consider speaking to a mortgage adviser before you’re ready to buy.
As Vicky puts it:
“Preparation is definitely key.”
Where can I get personalised mortgage advice?
This checklist is based on our conversation with Vicky Probert and is intended as a general information resource.
It isn’t personal mortgage or financial advice.
If you’re considering getting a mortgage, speak to an appropriately qualified mortgage adviser who can consider your individual circumstances and current lender criteria.
Further Resources
This blog is based on an episode which is part of Season Three of Everyday’s A Business School Day podcast. You can listen to move episodes on Spotify or wherever you like to listen to podcasts.
Why not have a read of some of our other blogs in our library.
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Identify the right networking format for you
Decide if networking groups are worth the effort
How to get the most out of your 121s
Ways you can build trust with your connections
Learn more about Growth Community member only meetings
Why member only meetings add value to membership
Want to get more from your business networking and events?
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If you’d like to connect with other small business owners, build relationships, learn new stuff and grow your business through a more proactive approach to networking and some excellent conversations, you’ll love using up your six annual free visits at our relaxed but structured meetings. Find one near to you on our locations page.
