Entrepreneur mortgages are not quite as difficult as you think. Startup founders and directors often believe that they are locked out of the mortgage market. Early on that can be true, but only for a while. Quite quickly, once your business is earning revenue and your equity is growing in value, you may be able to use your net worth to help you borrow a little more than you thought possible. Read on for more about entrepreneur mortgage loans…
What we mean by the word “entrepreneur”
This article is about entrepreneur mortgages – for the founders or senior people of investor funded high-growth start-ups – seed to Series A. Businesses that have a reasonably measurable equity value, probably £10 million or more, and in which you have meaningful shareholding.
If you’re:
- The company director of a more established, cash generative business, then read this.
Why it’s hard early on
Mortgages for entrepreneurs can be tough to arrange in the first year or two:
- Low salary – You’re earning little because you need to be careful with cash burn
- Sacrifice – You’ll often be paid a lot less than the salary you would command in a mature business
- Investors – understandably think that’s fair since your large shareholding compensates you and you’re taking their hard-earned money
- Shareholding – your shares are hard to value since you’re still finding product market fit
- Self-employed – If you own more than 20% to 30% of a business, most lenders will treat you as self-employed
- Personal Accounts – if you’re categorised as self-employed, lenders usually require 2-3 three years of your Tax Calculations and Tax Year Overview to lend to you. The absolute minimum is one year
- Net income They’ll assess your personal income after tax – salary and dividends and all or part of bonus income
- Company accounts – Lenders may also want to see business accounts and that’s a challenge since early startups are usually loss-making
- Averaging – They’ll often take an average of 2 to 3 years of your income to assess affordability
Why we love helping entrepreneurs get mortgages
Put simply, we’re entrepreneurs too. So we know what it feels like to get the cold shoulder from banks. We’ve been working as founders in startupland for 20 years with a number of successes, and even the odd failure. We know how insanely hard and equally, rewarding startup life can be.
Porthos & Co is our latest venture. We founded it explicitly to create financial opportunity for those with alternative incomes and work. So we feel mild glee that we have started to uncover methods to help entrepreneurs like you get a better mortgage. We admire your energy and creativity. It makes dealing with you a pleasure. And if we can get you a better, cheaper or larger entrepreneur mortgage loan, then that would be even more satisfying. Our aim is to be best mortgage broker for entrepreneurs
How to prove income
Your income is the key measure to prove affordability for any mortgage loan. Of course that includes your base salary, and dividends if you’re paying them – although that’s rare in startupland. But if you use the right broker and approach the correct lender, then we can also make sure that part or all of any bonus payments, commission and secondary incomes are also included.
The best way to prove income is to show P60 forms for any PAYE salary income. And your personal Tax Calculations for the last three years for anything non-salary. These can be SA302 statements downloaded from the HMRC website or more commonly they’ll be printouts from your accounting software, or that of your accountant.
It can be helpful to have the calculations prepared by a chartered accountant to prove their credibility. And a letter from the same accountant provides even greater comfort.
You’ll also need Tax Year Overviews which again can be downloaded from the HMRC site. They can help prove taxable earnings by showing the actual tax paid. Lending underwriters will usually cross-reference these.
Traditionally, many lenders demanded at least three years tax calculations, some accept less, as little as one year, but that will require explanation and justification, so make sure you use the right broker.
How much can you borrow based on income alone?
- Multiple – generally 4 – 4.5 x your assessed income
- Higher incomeOnce your salary is stable and above £50-75,000 then the multiple can rise as high as 5 – 5.5 x income
- Self-employed– the lower multiple of 4 – 4.5 x will usually apply if the lender classifies you as self-employed
- Dependents– reduce the amount you can borrow slightly, dependant on age
- Loans & credit issues – can reduce you’re borrowing capacity further, sometimes dramatically.
- Help – Speak to us, and we can help you achieve the best multiple
The secret sauce – How your equity can help
Once your business gets to seed stage or beyond, then opportunities can start to open up. And mainstream measures of affordability may not apply so strictly.
As your equity value grows then the chances are that you are a large minority shareholder in a potentially quite valuable business. You’ll probably be holding equity that on paper is worth £2 million or more. But remember you will need to evidence this, so recent proof that a number of independent investors have bought shares at the same price as your valuation will help.
All of the activities of a lender to do with residential mortgages are governed by the regulations of the Financial Conduct Authority (“FCA”). The FCA definition of a a High Net Worth individual (“HNW”) is anyone with assets worth more than £3 million or who earns more than £300,000 annually.
Can you qualify for an HNW entrepreneur mortgage?
Every lender is slightly different in the way they apply affordability rules. And that difference is understandably greater still, in the way they apply HNW rules.
Some lenders that we work with will give some weight to the value of your shareholding in your business. So they can consider treating you as high net worth once that passes the £3 million mark.
That evaluation can also include the equity value in the house that you’re buying. So, for example, if your equity is worth £2.8 million and you’re buying a £1 million house with a £250,000 deposit, then you might reach the definition of HNW. That matters because it starts to change the regulations about affordability, and can allow more flexibility.
But exciting though this is, do read some of our words of caution below.
High net worth mortgages for entrepreneurs
Once you’re deemed HNW, conventional affordability measures no longer apply. It’s possible to borrow as much as 6 to 7 x income, sometimes more as a HNW borrower. Lenders can also show more flexibility about interest-only mortgages and repayment terms. Mortgages for entrepreneurs now become a distinct possibility.
But remember no lender will want to offer you a mortgage which they think you might not be able to afford. They will still need to be convinced that you can afford the monthly payments on the mortgage as well as the redemption. That’s a lot easier to do if your business is growing and successful, and your equity valuable.
In such a case, it’s reasonable for a lender to expect your salary to increase relatively rapidly. The sale of your shares will eventually allow repayments of the mortgage. But in the meantime, you’ll need to demonstrate some fallback cash investments that you can use to make monthly payments in emergency.
Lenders are smart people and want to make prudent lending decisions. If you would honestly want to lend to someone with your situation and profile, then they probably will too.
The need for some liquid wealth
As an HNW borrower, you’ll need to show that you have access to the backup cash or liquid investments necessary to keep up payments, should your salary increase less quickly than expected, or even if your business were to run into trouble.
Exact numbers vary but you should assume that you’ll need roughly 10% to 20% of the value of your mortgage – enough to cover one to two years of payments. Examples include savings accounts, ISAs, investment accounts, or even a Joint Borrower that can demonstrate that they have access to such amounts.
HNW entrepreneur mortgages – Risks and caution.
It can sound attractive to be described as High Net Worth after all the necessary sacrifices of startup life. And even more attractive to buy a larger home than you were expecting. But it’s worth exercising some caution since such borrowing could mean you losing your family’s home, at the worst possible time.
If you’re unlucky enough to have to manage a business that’s in trouble and turn it around, it will probably be the hardest thing that you’ll ever do. At such a moment, it’s vital to have the security and support of a stable home and family life. The last thing you need is to see your house disappear. Such a loss can have an even more dramatic effect on relationships and family life, as well as you.
Mortgage repossessions happen only in a minuscule fraction of cases – far less than 1%. And the numbers have fallen significantly in the last two decades as lenders and regulators have improved measures of affordability. But you don’t want to be part of the group struggling with arrears or credit issues. No lender ever wants to repossess someone’s home.
So think carefully before stretching yourself to borrow more. Unless you’re sure that your business is on a fairly certain growth path, then it may make more sense to be cautious, borrow less or even continue renting.
Did you invent this?
We wish we could claim credit for better mortgages for entrepreneurs but we’re just Fintech mortgage brokers, not lenders. It’s the lenders themselves that have started to innovate more for certain groups of appropriate customers.
Where we are different is that we understand how to help you through the process better than any other, because of our knowledge of start-ups as well as expertise in the mortgage process.
In future we hope to help some alternative lenders create ways of offering you some liquidity secured against your shares and home, a form of entrepreneur mortgage loan. But that is very much work in progress and we will update you soon.
How to take the next steps to get a mortgage as an entrepreneur
Qualifying for a High Net Worth entrepreneur mortgage requires careful analysis and explanation to a lender. It’s a process that can take a little bit longer than an ordinary salary-based based mortgage.
You’ll need to get your paperwork together to provide the evidence. The guidance of a mortgage broker with the experience of having done this before is vital. So feel free to come talk to us and we can advise you whether such an approach makes sense for you. We believe we’re the best mortgage broker for entrepreneurs and the best able to help you.
