A sole trader's declining profits and a 30-year term
Mr Iqbal is 51 and a sole trader, applying for £210,000 over 30 years to buy a £260,000 house. His accounts show net profit of £52,000 in the year to April 2023 and £38,000 in the year to April 2024; his accountant projects £36,000 for 2025. He also has a car loan at £280 a month with 18 months remaining and two credit cards at their limits (£6,000 in total, minimum payments £150 a month). He wants the loan to run to age 81 to keep the payments down, and says he will clear the cards after completion using a gift from his father. The lender's affordability rate is 8.49% and its maximum age at the end of term is 75.
1. Which income figure should be used, and what does the trend tell the underwriter?
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Not the average of £45,000, and certainly not the £36,000 projection.
- The rule is that income must be assessed with regard to its reliability and likely continuance. A fall from £52,000 to £38,000 is a 27% decline in one year, with the accountant forecasting a further fall. That is the opposite of a stable pattern.
- The defensible figure is the latest year, £38,000, with a documented explanation of why the projection is not relied on; a cautious underwriter would use £36,000.
- Underwriters may use an average of two or three years where income is volatile but shows no adverse trend. Here the trend is adverse, so averaging flatters the case.
- The case should record what caused the decline (loss of a contract, a sector downturn, illness) and whether it has stabilised. Loans to the self-employed commonly fail on documentation, not on the arithmetic, so the accountant's certificate and the tax calculations must support the figure used.
2. Calculate the maximum term and the stressed payment, and assess affordability as structured.
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Term. 75 − 51 = 24 years, not the 30 he has asked for. The lender will cap the term at 24 years whatever the customer wants.
Stressed payment. £210,000 at 8.49% over 288 months:
- monthly rate 0.0849 / 12 = 0.007075
- annuity factor: (1 − 1.007075⁻²⁸⁸) / 0.007075 ≈ 122.79
- payment ≈ 210,000 / 122.79 ≈ £1,710 a month
Committed expenditure. Add the car loan £280 and card minimums £150 → about £2,140 a month before council tax, utilities, food, transport and insurance.
Income. £38,000 gross is £3,167 a month; net of tax and NI perhaps £2,600.
Conclusion. A stressed mortgage payment plus credit commitments of £2,140 against net income of about £2,600 is plainly unaffordable and fails any reasonable test. The proposal to clear the cards after completion from a gift does not help: the debt exists at application and must be counted, and if the gift later repaid it the lender would want evidence of the source and the cleared balances before re-running the case.
3. What restructuring would you put to the customer, and what would it achieve?
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Reduce the loan. At a stressed payment of, say, £1,200 a month over 24 years at 8.49%, the borrowing capacity is roughly 1,200 × 122.79 ≈ £147,000. That is £63,000 short of the £210,000 applied for, so the purchase would need a much larger deposit or a cheaper property.
Clear the credit commitments first, with evidence. Paying off the £6,000 of cards, and ideally the car loan, reduces committed expenditure by £430 a month and materially improves the stressed position. The lender will want bank statements showing the balances cleared and confirmation that the source was genuine, not a further loan.
Add a joint applicant. A second income may carry the case at the full £210,000 where the sole income cannot, but the second applicant's commitments and age must also be assessed.
Wait for the 2025 accounts. If the decline reverses, the case becomes stronger with a further year of evidence; if it does not, the customer should know now rather than after a decline.
Recommendation. Submit at a level the evidence supports rather than the amount requested. Advising the customer to apply for £210,000 on £38,000 would produce a decline, a hard footprint on file and a complaint.