Let’s be honest – buying a property is one of the most significant purchases that a person can make in their lifetime.
With the help of mortgages, you buy your dream home without emptying your bank account and buying the property outright. However, the process of getting a mortgage can be complicated, especially if you are a self-employed individual.
Luckily, you can get a mortgage on the basis of your net profits, which means that all hope is not lost. But if you are not as well versed in such things, you might wonder – what are net profit mortgages, exactly?
That is what we have discussed in this guide. So, read on if you are curious!
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What Is A Net Profit Mortgage?
Net profit mortgages are based on the net profits you make from your self-employment endeavours. In case you are unaware of the term, the net profit or net income is the amount of money you are left with after deducting all of the expenses from the revenue generated.
Net profit is different from gross profit, which is the amount of money you generate from selling a product or service.
For obvious reasons, it excludes the costs of production. However, it doesn’t exclude any other expenses, which is why gross profit is always higher than one’s net profit.
Consequently, net profits are much better in identifying the overall profitability of your endeavour.
And since self-employed individuals do not have any fixed income source like normally employed people, mortgage lenders often consider the net profits as their overall income.
Therefore, a net profit mortgage is nothing but a regular mortgage that is offered on the above basis.
Who Can Qualify For Net Profit Mortgages?
As we have already suggested before, mortgages based on net profits are only suitable for those who are self-employed.
On that note, there are different types of self-employed business endeavours that exist today, such as sole trading, partnerships, owning a private limited company and so on.
Accordingly, here are the different types of individuals who are eligible for net profit mortgages:
- Sole traders
- Private company directors
- People engaged in a business partnership
In short, if you undertake any business activity that can generate net profits in a year, you will be eligible and this will be the preferred source of income to be assessed.
Needless to say, you will need to prove your income to the lender while applying for the mortgage. For this, you will need to provide all the relevant financial details and documents to the mortgage lender.
Your application will only be approved once they are confident that you can afford the mortgage.
Of course, there are a few other criteria that the lenders will verify before giving the approval. These criteria include the duration for which you have been self-employed, credit history and credit status, age and personal details like identification and addresses.
How Much Deposit Is Required For A Net Profit Mortgage?
The amount of deposit that you need to pay for a net profit mortgage is the same as any other regular mortgage. Typically, this is around 20% of the property’s total purchase value.
However, there are some lenders that may provide mortgages with much lower deposits of 10% or even 5%.
Besides, the financial condition plays a key role in the amount of deposit you need to pay. For instance, if your net profit records are not that good, then the lender may demand a higher deposit, and vice versa.
The reason behind this is simple – they want to reduce the risks associated with the mortgage. If your net profits are low, then it indicates potential financial instability, which poses a big risk for the lender.
After all, if you are unable to clear the mortgage payments on time, the lender will have to suffer losses.
Of course, this aspect often varies between different lenders, so it is advisable to do some research before applying for a net profit mortgage. In this regard, you can try saving up some of the profits you have generated to increase your deposit amount. We highly recommend this approach instead of opting for low-deposit mortgages.
That’s because there are a large number of lenders willing to approve higher deposit mortgages. Moreover, you can get better deals and interest rates this way, which will reduce the money you need to pay for your monthly mortgage payments.
How Much Money Can You Borrow For A Mortgage Based On Net Profits?
In general, the amount of money that you can borrow from the mortgage lender depends on the financial conditions and accounting details that you provide.
But when you are applying for a mortgage based on net profits, then the aspect of net profit generated will naturally take precedence over others. In this situation, you will need to provide details of the net profits generated over the past few years of self-employment.
Once you have determined that, you can calculate the total amount that can be borrowed from the lender. Usually, you can borrow up to four-and-a-half times your net income/profit without any issues but this will vary based on lender.
However, some lenders may have stricter regulations, due to which the borrowing amount might be less, possibly two or three times your income. On the other hand, some lenders may even allow you to borrow up to five or six times your net profit/income.
Keep in mind that the higher the borrowing amount, the more proof you will need to provide. For instance, if you want to borrow a large sum of money that is around six times your income, then you will need to provide solid accounting proof.
This should include a detailed statement of your net profits over the past few years that can demonstrate your affordability.
How To Apply For A Mortgage With Net Profits?
There is no denying the fact that there are a lot of financial uncertainties involved with self-employment. This is true even if the recorded net profits in recent years are solid. That is the reason why many lenders and homebuyers feel sceptical about net profit mortgages.
As a result, applying for such a mortgage feels much more complex than usual. However, with the correct guidance, you can get a mortgage based on net profits without any issues.
The first step in applying for such a mortgage as a self-employed individual is to seek help from an established mortgage broker or financial advisor.
These individuals or organisations have considerable knowledge about the market and the mortgage application process.
So, before you get in touch with a lender, you should get your finances and net profit records checked by the broker or advisor. After a careful analysis, they will be able to suggest the most suitable strategy to proceed.
In fact, the broker may even be able to refer you to a few reputed lenders. As such, the chances of your net profit mortgage being approved will be higher, making the whole process more convenient.
Of course, you will still need to submit all the necessary documents to the lender for verification. This is the next step in the application process, which can take some time to complete.
And once the mortgage lender has verified the details, you will need to sign the necessary documents and submit the initial deposit to get the mortgage.
We hope that the information provided in this guide has helped you to clear all the confusion regarding net profit mortgages.
It is true that the approval process can be a bit more complicated than those followed for people with fixed incomes. But if you follow the guide and have a good net profit history, then you won’t have any trouble securing a mortgage as a self-employed individual.
Always remember to consult a skilled broker, as they can make the process much easier. And make sure to provide updated financial details about the profits you have generated over time.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.