Are you employed by a family business?
Being employed by a family business can sometimes pose challenges when it comes to getting a mortgage. Lenders may be more cautious when evaluating these types of applications due to the complexity of the arrangements and the potential for conflicts of interest.
Family businesses may have unique financial structures, and lenders may need to carefully evaluate the borrower’s income and financial stability.
Can I get a mortgage if I’m employed within a family business?
Yes, it’s possible to get a mortgage if you’re employed by a family business, although the structure of the company and the percentage of any shares you own in the company will determine how the case is underwritten.
How are mortgages for employees within a family business assessed?
Mortgage lenders have specific criteria for assessing self-employed applicants for a mortgage, and it can vary between lenders. However, as a general rule, if you own more than 20-25% of the business, lenders will consider you as self-employed and assess your income based on company accounts or tax returns.
Typically, lenders will require at least two years of trading history for self-employed applicants, and they may also require additional documentation, such as proof of income and business accounts. If you own less than 20-25% of the company, you may be treated as an employed applicant, and lenders will use the income on your payslips to assess your affordability.
What checks do they carry out?
Mortgage lenders may conduct various checks for applicants who are employees within a family business.
These may include:
- Shareholding on Companies House: Lenders may verify the applicant’s shareholding in the family business by checking the Companies House records to confirm the percentage of ownership and any changes in ownership over time.
- Income stability: Lenders may review the applicant’s income history to ensure that there have been no sharp or sudden increases in income that may indicate irregularities or inconsistencies.
- Reasonable pay: Lenders may assess whether the applicant’s salary is reasonable for the type of work they perform within the family business, taking into consideration industry norms and market standards.
- Employment duration: Lenders may verify the applicant’s employment history within the family business, including the duration of employment and consistency in receiving payslips for at least 3 months or longer.
- Financial records: Lenders may request financial records of the family business, such as profit and loss statements and tax returns, to assess the overall financial health of the business and ensure it is capable of sustaining the applicant’s income.
Most mortgage lenders will treat the applicants as self-employed if they receive or want to use dividends from income from the family business. They will then usually require 2 years of track history
Use of dividend income for applicants employed within the family business
In many cases, mortgage lenders may treat applicants who receive or want to use dividends from income from a family business as self-employed, even if they are employees within the family business.
This is because dividends are typically considered a form of self-employment income, as they are distributed to business owners based on the profits of the business.
As such, mortgage lenders may require a track record of at least 2 years of dividend income to establish its stability and reliability. This may involve providing financial statements, tax returns, and other documentation that demonstrates the history of dividend income from the family business.
How long do you need to have been employed within a family business for mortgage purposes?
Mortgage lenders may typically require a shorter track history of at least 3 months for applicants who own less than 20-25% of a family business and may request 3 months of payslips and bank statements to verify their income.
However, if the applicant is applying for a mortgage based on a second job within the family business, lenders may require a longer track history of 6-12 months to assess the stability and reliability of the income.
On the other hand, if the applicant owns more than 20-25% of the family business, lenders usually require a longer track history of at least 2 years to assess the stability and viability of the business, as well as the applicant’s income from the business.