Mortgage advice: ‘Should I switch to PAYE to get a better mortgage rate, even if it makes me worse off?’

Freelance prop maker Ben Crooks  (Daniel Hambury/Stella Pictures Ltd)
Freelance prop maker Ben Crooks (Daniel Hambury/Stella Pictures Ltd)

Ben Crooks is a freelance prop maker who lives with his wife and two children in a three-bedroom, semi-detached house in Molesey.

His fixed mortgage rate is due to expire in April 2023.

“My mortgage adviser did the sums and my repayments are set to go up to £2,600 a month.”

This would be based on what he can currently get, 5.4 per cent for a two-year fixed, but in April the situation might be different, and the rates might be even higher.

“It’s heart-breaking that the extra £1,000 is just going on interest and not even paying anything off.”

The details

Price paid in 2016: £580,000

Mortgage rate on a five-year fixed: 1.37%

Monthly payments on a repayment basis: £1,665

Mortgage balance: £404,000

What makes things even trickier is that Crooks has set himself up as a limited company for his work. “Being a limited company, you have a lot of lenders who don’t want to lend to you. I pay myself the minimum wage and then split the dividends with my wife, but lenders won’t accept dividends.”

He could switch to paying himself as PAYE to get a better mortgage deal, but he’d have less take-home pay and couldn’t pay dividends. “In reality, I’d be in a worse situation. Ideally, I want to stay in as a limited company, but I’d have to stay with the same lender and my rates will really go up.”

The advice

Simon Gammon, Managing Partner at Knight Frank Finance

Many lenders do accept dividends when assessing how much they will lend, but each one will have slightly different criteria for how they assess borrowers. Those that do accept dividends as income may consider Ben’s broader circumstances.

A key question might be whether his business has a track record of regularly paying out dividends, for example. This is where a good mortgage broker can save you money and time.

My advice to Ben would be to speak to a broker that covers the entire market.

The next step would be to lock in a fixed rate now that will be valid when his deal ends in April. This is good advice to all borrowers — we know mortgage rates are likely to move from where they currently stand, so the earlier people engage the better.

Finally, I’d also consider variable rate products. Rates are currently cheaper than fixed products, though most borrowers put a premium on knowing exactly how much interest they’ll be paying a year from today. Whether or not a variable product is the right option for Ben will be down to factors including his appetite for risk and surplus cash flow.

Narinder Kaur, Goldwire Financial Solutions Limited

Stay as a limited company, as nearly 30 lenders accept salary and dividends for affordability purposes, including Halifax, Barclays, Nationwide, TSB, and Skipton. Most will take two years of tax returns and work out an average of both incomes; a few may take just the last year’s tax return if the income is higher than the year before.

In the economic climate, I understand the concerns people have about uncertainty but there are things in place to help you. For example, if you’re not eligible for products on the open market, or don’t think they’re suitable, most lenders will offer a renewal deal.

This is a product switch and, in most cases, if you’ve kept a good standing relationship with your lender, there’ll only be limited underwriting as lenders won’t need to verify income.

You should seek independent advice from a qualified professional before acting upon any information contained in this article