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Can I get a mortgage with an LLP?

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Can I get a mortgage with an LLP?

Can I get a mortgage with an LLP?

David explains how the mortgage process works if you are in an LLP.

Podcast approved by The Openwork Partnership on 4/7/2024

What is a limited liability partnership? Can you get a mortgage as a partner in an LLP?

A limited liability partnership is a kind of a business set-up. If you’re an individual working for yourself, you might be self-employed. If you work with someone else or a group of individuals, you might get together to form a partnership, where each of you owns a percentage of that business entity. That’s essentially what a partnership is.

The Limited Liability aspect just means that each partner within that entity has limited personal liability. If the business gets into debt, for example, it can’t be claimed from you as an individual.

You could absolutely get a mortgage as an LLP partner. Lenders have varying policies around how they treat you and your income, and to them you’re essentially self-employed. We could get you a mortgage on that basis.

Can a new partner in an LLP apply for a mortgage? Can I get a mortgage if I’ve only been a partner for a year?

As a partner of an LLP, you’re self-employed, and most lenders would need a minimum of two years’ trading for a self-employed applicant. That’s because your income is a bit less guaranteed than for a permanent employee with fixed earnings.

With an employee it’s fairly easy to see what they will be earning for the foreseeable future, whereas someone who’s self-employed has a more variable income.

Lenders typically want a two-year track record to see some consistency in your pay. They’ll generally take your income from an average of the last two years, or just the latest year if it’s lower.

However, if you are a partner of a larger LLP, you don’t necessarily have to have those two years’ evidence. We work with a lot of law firms here in London that may have a couple of hundred partners. Their newly appointed partners may well have some fixed element of pay, like a minimum draw they receive.

In a lot of cases, lenders will just use that minimum draw. The advantage is you could use that income straight away, so you don’t need to wait two years. The disadvantage is that your borrowing is just based on that minimum draw, and any additional profits can’t be used until you’ve got the evidence in that two year track record.

So if you are a newly made up partner, there’s no reason why we can’t get you a mortgage. Some lenders look at that fixed element of your pay, while others might even look at your earnings as an employee of that firm before you became a partner.

How are partners in an LLP assessed by lenders for mortgage purposes? What mortgage criteria does a partner need to meet?

To utilise the full income you receive as a partner, most lenders will look at the last two years of tax calculations for you as an individual. That states essentially what you take out of the partnership.

On your self-employed tax calculation, that will show up as profits from partnerships. Most lenders average the last two years if it’s increasing, and if it’s decreasing they just use the most recent year’s figure.

In terms of income, it’s fairly straightforward. We just need your tax calculations and corresponding tax year overviews for the last two years.

If you’ve not been a partner for the full two years, we would look at your fixed element of pay. That might involve getting a letter from your finance director confirming what your minimum drawing is. The rest of the criteria and how you’re assessed is all standard.

Being self-employed doesn’t make any difference to how the rest of the case is assessed. It’s just your income and how that’s treated that we focus on for a partner in an LLP.

What documentation will lenders want to see as an LLP?

As we mentioned, we need those two years’ tax calculations, or a letter confirming the fixed element of your pay. Those prove your income.

Other documents which are standard for all applications including proof of ID – typically a passport – and proof of address, which might be a driving licence or utility bill. We also need bank statements showing your general outgoings.

That’s the core of it. Some lenders might ask for other bits and pieces, but those are the main documents we would require.

When a new client wants to establish what they could borrow, we tend to take it a step further and approach a lender for a Decision in Principle. That just confirms your maximum lending, by running a soft credit search to make sure the lender’s happy with your credit profile.

That gives you a bit more certainty before you start looking at properties and making offers. Those documents we mentioned are needed to get your Decision in Principle.

It helps in two ways – you’ve got the documents ready for a full application, when you find a property, but also enables us to do that initial pre-approval. It means you’re confident about what you could borrow.

How much can a partner in an LLP borrow? How much deposit is needed?

The amount you could borrow is a standard calculation. It’s not determined by how you’re employed. Each lender will have their own criteria around assessing your income and coming up with an affordability figure.

Once they have that income figure, the affordability calculations are applied the same way for all borrowers. Initially they come up with a maximum loan, which is usually a multiple of your income. Most people are fairly familiar with this. It’s somewhere between 4.5 and 5.5 times your income as a maximum you could borrow.

The second assessment is affordability-based. They’ll look at your net income each month and how much you pay out in committed expenditure. That might be things like personal loan repayments and how much it costs to support your children. Then they work out how much is left to pay the mortgage.

The income multiples are determined, in some cases, by the percentage of deposit you put in. To get to higher borrowing, lenders generally want you to receive a higher basic income. Typically, if you earn more than £100,000 you might get 5.5 times your income.

Alternatively, your deposit amount could be over a certain level, which might be 25%. With some lenders it’s less, but that’s a rough guide. I’d always recommend getting in touch with a broker for a chat about your actual numbers to work out what is possible for you.

How does remortgaging work as a partner in an LLP?

It’s the same as a purchase application. The lender will work out from your partnership income what to use in their assessment. That will determine how much you could borrow.

The documentation and the rest of it is the same as with a purchase application. You’re just refinancing rather than buying a new property, and everything else is all the same.

Can I get a mortgage as a partner in an LLP if I have bad credit?

It might be possible. It depends on how bad it is. Being a partner of an LLP doesn’t impact the credit scoring or the level of credit they will or won’t accept. That is purely down to the lender’s criteria.

When you make an application, lenders run a credit search looking at your credit profile and history of payments. The level of credit they need to say yes to you as a borrower is not determined in any way by the type of employment you’re in. Whether you’re a partner of an LLP, or employed, or a limited company director with 100% shareholding, it’s not a factor in the credit decision.

One thing that could affect it is the level of deposit. Lenders generally have less strict credit scoring if you’re putting in a larger deposit. It’s not so risky for them if you’re borrowing less against the value of the property.

The only way to know for sure whether or not you will be approved is to run a Decision in Principle. We recommend getting your credit reports early on in the process.

Interestingly, the credit score applied by someone like Experian or Equifax doesn’t directly correlate to a lender’s credit scoring systems, which can weigh certain things more heavily than others. Knowing your credit score with Experian doesn’t actually tell you whether Halifax will accept you. But applying for a Decision in Principle gets you a specific answer.

Certain things on your credit file could make it more difficult. A default CCJ from the last couple of months is never going to bode particularly well. But beyond that, we would run a Decision in Principle to see what lenders come back with.

How can a broker help a partner in an LLP get a mortgage?

Something I often discuss with clients that are partners of LLPs is offset mortgages. If you’re a partner of an LLP, you’re typically going to be paid gross of tax, and that first tax bill doesn’t necessarily need to be paid for up to 18 months.

If you’re sensible, you will set aside a pot of money to pay your tax bill when the time comes. An offset mortgage could be quite good here, as it’s essentially a mortgage plus a linked savings account.

Any funds within the linked savings account are deducted from your mortgage balance each month when they’re calculating the interest payable. It could be very beneficial and is well worth exploring.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Approved by The Openwork Partnership on 4/7/2024