What Net Profit Actually Means for Your Mortgage

If you run your own business, the income figure on your mortgage application is rarely as simple as "what you earned this year." Lenders do not work from your turnover, and they do not work from what you have left in the bank. Most work from your net profit, the amount left once your business has paid its running costs, and in some cases its tax too.

Get this wrong and you can end up applying to the wrong lender for your income shape, being offered far less than you expected, or being declined outright when a different lender would have said yes. Understanding how net profit is actually used is the difference between a smooth application and a frustrating one.

Net Profit Versus Gross Profit

Gross profit is your income after the direct cost of the goods or services you sold. Net profit goes further, deducting business expenses, finance costs and, for limited companies, corporation tax. It is the figure that shows what your business genuinely generates once everything else has been paid for.

Lenders use net profit because it reflects real, sustainable income rather than a headline revenue number that might include costs you have not yet accounted for. A business turning over a large amount but keeping very little of it will not support the same mortgage as one with a smaller turnover and a healthy margin.

How Sole Traders Are Assessed

If you are a sole trader, your net profit is the figure lenders start from. It is evidenced through your SA302 tax calculations and HMRC tax year overviews, cross-checked against certified accounts if you have an accountant.

Where income has grown year on year, some lenders will use your most recent year's figure. Others average the last two years, which can work against you if last year was a strong one. Because the approach varies so much between lenders, this is one of the areas where matching the applicant to the right lender makes the biggest difference to how much you can borrow.

How Partners Are Assessed

In a partnership, lenders look at your share of the partnership's net profit rather than the business's profit as a whole. Your share is usually based on your ownership percentage as set out in the partnership agreement, so two partners in the same firm can have very different assessable incomes depending on how the partnership is structured.

Limited Company Directors: Two Different Approaches

This is where the net profit conversation matters most, because company directors are assessed in one of two ways and the difference between them can be substantial.

Salary plus dividends. This is the default approach used by most high street lenders. They add your salary to the dividends you have actually drawn from the company, and ignore anything left in the business as retained profit. If you take a modest salary and dividend to keep your tax bill down, this method can understate what your business really earns.

Salary plus net profit. A smaller number of lenders will instead look at your salary plus your share of the company's net profit, whether or not you have drawn it out as a dividend. For directors who deliberately retain profit in the business rather than paying it out, this route recognises income that the salary-and-dividends method simply does not see, and it can significantly increase how much you are able to borrow.

Neither method is right or wrong. They are just different lenses on the same set of accounts, which is exactly why two lenders can offer wildly different amounts to the same director on the same figures.

How Many Years of Accounts You Need

Most lenders ask for two years of accounts or SA302s, and will look at whether your income is stable, growing or declining across those two years. A smaller number of specialist lenders will consider a single year of accounts, usually where the trading history is otherwise strong. We have covered what a one-year accounts application looks like in more detail here if your business is newer.

You will typically also need to provide recent business bank statements alongside your tax documents, so lenders can see the figures on your accounts are reflected in the money actually moving through the business.

How Much You Could Borrow

Once your net profit figure is agreed, lenders apply an income multiple to it in the same way they would to a salary, generally somewhere in the region of four to four and a half times your assessable income, occasionally higher depending on the lender and your circumstances. The rest of the usual factors still apply on top of that: your credit history, the deposit you have available, and the loan-to-value you are borrowing at. Current rates across the lenders we work with will also affect what is affordable at your income level.

The gap between what one lender will offer and what another will offer, purely because of how they treat net profit, is often the single biggest variable in a self-employed application.

Why This Is Worth Getting Right Before You Apply

Because lenders treat net profit so differently, the application itself is really a matching exercise: finding the lender whose method suits how your business is structured and how you pay yourself, rather than applying to whichever bank you already have an account with. As a whole-of-market broker, we compare how each lender on our panel treats self-employed and director income before recommending where to apply, so you are not guessing which approach works in your favour.

If you are self-employed and want to know what your net profit could mean for your borrowing, get in touch with the team and we will talk you through it.