Mortgages and Self-Employment / Company

11-05-2022 12:32pm #1

Just wondering if people who are self-employed, or those who are owner-director of a company, are held to a different standard to your standard employees when applying for a mortgage?

Are those who own a company and draw a monthly salary from it, considered "higher risk" compared to a standard employee, and would this impact my mortgage application?

I'm fully tax compliant, so there are no issues there. I will be applying for a mortgage later this year / early next year, and wondered whether the gross income that comes into the company is considered the gross income of the owner-director who is applying for the mortgage? Say, for example, the company shows a gross income of 200,000 euros. Does the bank consider that the gross income of the owner-director (who has no employees), or is some other factor considered?

Furthermore, I would have thought the value of the company (3.5x gross income) would be considered favourable to any bank? In that, a self-employed plumber, for example, only has his income. But an established business can be sold for 3.5x its gross income. Do banks consider this at all in applications?

Thanks in advance for any replies.

Henry Ford III · 12-05-2022 8:08am

Max. loan is based on directors salary not corporate profit or value.

12-05-2022 9:02am

https://www.boards.ie/discussion/comment/119049601#Comment_119049601

Isn't that absurd?

So a director could earn 200,000k for the company, only take out 25k in salary, and the remaining 175k per year is totally ignored and the 700k company valuation. Yet, according to what you say, he can only take out 90k in mortgage.

Whereas if I was self-employed and had all the income come into my personal account, then it's considered another way completely.

Henry Ford III · 12-05-2022 9:27am

https://www.boards.ie/discussion/comment/119049743#Comment_119049743

It makes sense if you consider that the money made by the self employed person in your example is immediately theirs.

Money in a co. bank account belongs to the co.

P.s. Max. pension contributions are based on salary too and not profit.

12-05-2022 9:47am

https://www.boards.ie/discussion/comment/119049841#Comment_119049841

Well, this certainly puts me in a far more challenging position than I originally believed.

Are you aware of any circumstances in which the company itself can be taken as applying for a mortgage, if that makes sense. Though, if you have a partner - who is not part of the company - but simply on PAYE, can they be considered part of the mortgage too?

eusap · 12-05-2022 10:09am

You need to separate The Company / You / Partner into 3 entities.

The Company is its own legal entity, it can have cash/loans etc... based on its performance, if it takes out a mortgage it is normally for commercial premises. If it bought a residential property it is normally for commercial gain (renting out)

You/Partner, can apply for a joint mortgage and 3.5 times your gross income, income is the money paid into your personal account

You as a director of a company will need to have at least 2 years of certified accounts for a mortgage application, this is to prove your job stability not for the mortgage amount. Your partner will need payslips to prove their income

Furze99 · 12-05-2022 10:37am

Change to a sole trader. Will then come down to your 'taxable income' I think.

12-05-2022 10:40am

https://www.boards.ie/discussion/comment/119050145#Comment_119050145

That's what I find irritating about the whole thing.

The net circumstances are literally exactly the same. My company has no loans or other complicating factors, either (inc. no other employees).

I get from a legal perspective there is a distinction to be made between the company and its owner/director, but in terms of my ability to pay a mortgage - this is grossly underestimated if based on my gross income from salaries.

Put another way: if I didn't take a salary over the past year, I'd presumably have no right to a mortgage at all!

It's just totally wrong.

It should be based on company performance and the ability to establish the means to draw a salary that is capable of paying a mortgage.

I am currently paying by myself (without my partner's income) 2,300 in rent per month. This is way, way, way more than what I would be paying with a mortgage of a reasonably good home worth 600-800k. And I'm paying this rent super-comfortably and have never once delayed a rental payment over the past 5-years.

Yet according to this system, a bank would want me paying 600-800 per month in rent or something like that for a house worth 300-400k.

Furze99 · 12-05-2022 10:57am

Yes but presumably its a limited company you have, which has some tax benefits and reduced exposure to debts etc. From the lenders perspective, that's more risky - harder to get their hands on your assets if they need to. A sole trader - everything the business has is yours and more accessible. Makes sense from their perspective, they're not just looking at your capacity to finance to loan but also what happens if you go belly up.

Mind you, there's been some big boys and gals who seem to have had large mortgage / property loans, who then declared themselves unable to pay and the banks (taxpayer) just had to suck it up. But society would prefer to avoid that.

Henry Ford III · 12-05-2022 11:05am

The only way is to pay yourself a sufficient salary under PAYE to justify whatever level of mortgage you want. Which if you think about it is exactly the same as any other employee.

The key point to remember is that any profit or value in the Co. isn't the property of it's owner/director. That's represented instead by the value of your shareholding.

Henry Ford III · 12-05-2022 11:07am

https://www.boards.ie/discussion/comment/119050159#Comment_119050159

If you drew no salary how might you repay a mortgage, or even buy a cup of coffee?

eusap · 12-05-2022 11:10am

If "The Company" board decide tomorrow to sell/gift Equal shares to 9 people at €10 each where does that leave the Bank? The 700k valuation is only worth 70k to you. The company is its own legal entity and nothing to do with personal finance

Look at it in reverse a company with 20 shareholders and 500mil in valuations if they all used the company finances to get mortgages which bank would get the money first in the case of a default!

12-05-2022 11:18am

https://www.boards.ie/discussion/comment/119050344#Comment_119050344

https://www.boards.ie/discussion/comment/119050313#Comment_119050313

I completely get the point, I do.

But let's flip it on its head for a second:

If I have demonstrated an ability to capably and comfortably pay a rent of 2,300pm (managing said company as an "employee" to ensure this payment can be made), then what sense does it make for a bank to rate my ability to pay a mortgage value of 800pm (and this excludes my partner, which makes my ability to pay 800pm even more laughable).

(In fact, in that instance, I'd nearly be half-tempted to pay off the mortgage in full as fast as possible, and upgrade to the kind of house I want)

I am effectively an employee taking a salary from a company, like everyone else.

The only difference between me as an employee and a standard employee is that I have the ability to choose my monthly salary.

What's vexacious is that a bank will interpret my chosen monthly salary, which varies, as the cap on what I can afford to pay for a mortgage.

eusap · 12-05-2022 12:15pm

so based off rent only your gross salary is around 55k, assuming rent is 50% of salary your gross is probably around 110k, all you need to do is take max salary out for 6-12 months show that bank the company can sustain that rate and you have your mortgage of around 400k plus cash deposit

Mortgages and Self-Employment / Company

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