Let’s look at a scenario where your business is performing well, and the profits in your last accounting year are higher by a considerable margin than in the previous years:
Many lenders will ask for your last three years’ worth of self-employed accounts, and calculate the average as your base income. In this case, that would be:
(£30,000 + £35,000 + £49,000) ÷ 3 = £38,000
If we assume the lender applies a basic income multiple of 4.5 to determine the maximum you can borrow, this would be:
£38,000 x 4.5 = £171,000
However, if a lender is able to base its borrowing calculation on the last year’s accounts alone, this would give:
£49,000 x 4.5 = £220,500
As you can see, the difference between being able to borrow £171,000 and £220,500 is not insignificant. Both are based on your actual income figures, but a simple variance in lending criteria can make a massive difference to the home you could possibly afford to buy.