Why high-value lending demands a broader view of self-employed income

I’m sure you’ve all encountered cases where a successful business and a strong personal balance sheet haven’t translated into the borrowing capacity a client might expect. This can be particularly apparent in higher-value mortgage cases, where substantial retained profits, multiple business interests and differing methods of extracting income can create a disconnect between an applicant's financial position and the amount they are able to borrow. 

The challenge is often less about establishing whether a borrower has significant financial resources and more about understanding how those resources are assessed, particularly when relatively small differences in lender methodology can have a considerable impact on the outcome. 

Looking beyond the headline figures 

The interpretation of business accounts becomes especially important where a client has interests in several companies or their earnings have changed significantly between accounting periods. 

A reduction in profitability might follow a period of investment, restructuring or expansion rather than weaker underlying trading. Equally, exceptional earnings in one financial year may require closer examination before they can reasonably be considered sustainable. 

Ownership arrangements introduce another consideration, particularly where companies operate through holding structures or have different shareholders.

Understanding how profits are attributed across these arrangements can be important when determining which income a lender is prepared to recognise. 

The significance of retained profits 

One area where lending criteria is evolving is in the treatment of profit after tax (PAT), particularly where company directors choose to retain earnings rather than distribute them through dividends. In larger mortgage cases, the difference between assessing salary and dividends or considering an applicant's proportionate share of PAT can have a meaningful impact on affordability.  

At Barclays, we recently updated our criteria to allow qualifying directors to use their share of PAT in affordability assessments regardless of property value, subject to ownership and minimum income requirements. Importantly, this recognises that the decision to retain profits within a business does not necessarily reflect a lack of personal borrowing capacity. By taking a broader view of income, we can better accommodate the financial arrangements of successful business owners, particularly where larger mortgage requirements are involved. 

Understanding the wider borrowing requirement 

Of course, how income is assessed is only one consideration in higher-value lending. The purpose of the borrowing and how it fits alongside existing property finance, investment commitments or anticipated changes to a client's financial circumstances can be equally important in determining the most appropriate mortgage structure. 

A business owner planning an acquisition, for example, may wish to preserve liquidity, while another may be seeking to refinance an existing property to support longer-term financial plans. Establishing these priorities early can help inform discussions around loan structure, repayment strategy and the supporting information a lender may require. 

Accountants and other professional advisers can also provide valuable context, particularly where recent financial statements do not fully explain changes in a client's circumstances or future commitments. 

Making the most of lending flexibility 

The development of more flexible approaches to self-employed income is encouraging, particularly as larger loan requirements can magnify the impact of differences in how lenders assess affordability. However, flexibility is most valuable when supported by a clear understanding of the client's circumstances and the evidence needed to substantiate their application. 

The opportunity for intermediaries lies in bringing these elements together, ensuring that borrowing decisions reflect not simply the income recorded in the accounts, but the financial position and longer-term objectives of the individual behind them.