Full Transcript
Dr James:
What is up everybody? Another episode of the Dentistry and Fests podcast, shooting live in 2024, with returning face, sarah Grace Expert. Hi, hello, hello again Sarah Expert on mortgages. And that’s exactly what we’re going to talk about today, because we’re going to talk about how lenders define income, because how dentists define income and how people define income, not actually exactly the same right, sarah.
Sarah:
Yeah, no, no, exactly yes. So if we start at the beginning, the beginning of the dental career path, you’ve just finished your FD and then you go as an associate, typically in a NHS mixed practice. So you don’t have two years accounts or even one year accounts of some lenders that will do that. We can work off either your UDA contract value and lenders will use that full value. So if you’re doing 4000 UDAs, at which we seem to be getting people earning 13.59 that seems to be the sort of new rate for UDAs, so we’ve only got a 54K, and then you might have some private income on top of that. We’ve got lenders that will use 54K and then we’ve got lenders that will use the average of, let’s say, your last six months pay schedule or less if you’ve got less months. So that’s that income. Then we might have once you’ve got one year’s accounts. We’ve got high street names that will do one year’s accounts. So you don’t have to have horrible rates, and even on the pay schedules they’re not horrible rates either. We’ve got several lenders that all work on pay schedules. So then we’ve gone to you’ve been a sole trader typically, and then your accountant, because your income is going to go over 100K or 50K, even to keep you out of the 40% bracket, might your accountant might advise you to go limited. So then we’ve got the potential problem of lenders then not using your income because you’ve not got two years figures in your new trading style, which that’s not a problem with several lenders High street names as well it’s just knowing who to go to. And then we’re looking at limited companies where typically you’ve perhaps got husband and wife or wife and significant other or husband and significant other. We’ve then perhaps got where you’re in established practice and you’re keeping your income tax efficient and you might be taking, just like, say, salary and dividends of 50K each. So your combined income, from some lenders point of view, will be 100K. So I have clients say what’s the biggest income multiplier I can get with a lender? So you can get six times but that might be six times of your salary and dividends, which, if that’s 100K, is like 1.2 mil. So the 1.1 mil sorry I can’t be the maths yeah, but then your profits. And I had this case yesterday husband and wife taking 100K between, or they were taking 100K each, but the profits of the business was 500K. Now I’ve got a lender, several lenders that would do five and a half times the profit plus their salaries. So you know we’re looking at an income each of over 100K. They will land five and a half times of, like the 200K, so then you’re sorry of the 500K. So then you’re looking at a massive 2.75M instead of the 1.2M. So you know what is income. It’s what the lenders, the way they look at it, it can be very, very different.
Dr James:
Depends which lender you ask? Basically is the answer to that question what is it? How do they define?
Sarah:
it.
Dr James:
Yeah, so another message in there is to shop around and that these things are possible, right.
Sarah:
Yes, yeah. So you know there’s some lenders that will just work off salary dividends, what’s on your tax return, and you know they might have good rates but out there at the moment. You know, today we’ve had one of the lenders that will work off your profit and they’ve got the market leading. You know rates and so you know it doesn’t mean to say that you can’t have what you want and don’t. The amount of clients that say my accountant’s asked me what dividend I should take this year and so they’re going to take an extra dividend and pay more tax on when they don’t need to.
Dr James:
Interesting. And last question so there’s actually two things on my mind that just popped into my head when you were talking just then. So first of all, I know that some lenders from what you were saying, some lenders use salary plus dividends as how they define income. Are they ever funny about the dividends on top Like? Will they ever insist that it’s purity income as an income that is taxed as income tax? Will they ever insist that you can only get a quote based off that income per se? Does that make sense and not have the dividends in there as well?
Sarah:
Like do they always? Are they always?
Dr James:
okay about including dividends in the tally.
Sarah:
Well, if they’re only working with God’s salary and dividends, they’ll only work off that. What the lenders that work off the profits? They’re not going to add back into the dividends, because the dividends are only paid from the profits. So it’s one or the other.
Dr James:
Yeah, got you. Yeah, so you said two things then. Yeah, and you said that. First of all, the first thing that you said was income plus dividends. When they’re working off income, it’ll always be those two things together and never separate, right?
Sarah:
Yeah, salary and dividends, profit and salary yeah, because salary is taken out of the profit to come to the profit figure that they’ll add the salary back. Now some people they might do the 60K pension contribution, which you can do, and some people say, well, you can add that back in. And then, yes, there are lenders that will do that. But then you’re looking at a specialist lender and higher rates. So things are always possible. What we’re talking about today is getting your mainstream lenders your decent rates. Things are always possible. But when you start asking for sort of stretched criteria, that’s when you’re going to sort of more specialist than you pay a higher rate for.
Dr James:
All right, cool, thank you for answering that, and I’m going to guess that the lenders that consider profit as income. I’m going to guess that they ask for a higher rate.
Sarah:
No, they don’t. Totally counterintuitive. So I was like, yeah, we’ve got market leading rates and they are lenders that will work up proper.
Dr James:
I can’t be the first one to be surprised by that, because it is counterintuitive, right it used to be me, it’s just knowing which lenders do which. Okay, cool, Well, listen, thank you for all of that. Anything else we should know on this topic about how the lenders define income? Any other considerations? Because to me we’ve been pretty comprehensive there. We’ve covered it. It’s either going to be in a flipping company or it’s going to be a personal first. There’s not a whole lot more to it. Well, that’s just something else in there.
Sarah:
No, there’s always. Quite often things aren’t vanilla, which is why I come by job. I never challenge. But no, it’s pretty straightforward. Obviously, there’s other things that might be classed as income as well. So if you have child benefit and or maintenance payments, those things will be classed as income as well. Not all lenders will take child benefit or any DSS payments into account, but by to let, profits can also be taken with income. So, yeah, I think it’s just the case of speaking to a mortgage advisor. Obviously, I’d love you to come to me, but there are other people available, especially in the investor group. Speak to your advisor, because they will be able to tell you or advise you and help you work out what is your income.
Dr James:
How about this? So, broadly speaking, most dentists will have one of two categories, I suppose, of limited companies. It’s either going to be for their actual dental practice or it’s going to be into which they were, the company into which they receive their private pay. Right as a list of the two so what do you mean?
Sarah:
they have multiple limited companies.
Dr James:
No, no, no. What I mean is so, broadly speaking, dentists fit into two categories With me. They’re either associates, who have limited companies, because they’re receiving the pay into it, or the other category is going to be principals, who have dental practice. Yeah, so let’s talk about those two groups. Is there anything you need? To know never it comes to how we define income, comparing those two parties, or is it all exactly the same?
Sarah:
If we’re using the account, it’s the accounts that we’re using, so it doesn’t matter whether they’re an associate or a principal, which I’ve actually got my sort of. I’ve got a mortgage on my desk at the moment where the dentist have actually started their first associate position as a limited company. I tend to find that people go so full trader to begin with and then switch to a limited company, but they’re going limited straight away. Now we can use the pay schedule criteria on that person because they are an associate, so they’re getting their pay via an HLAS private on their pay schedules from their principal.
Dr James:
Question okay, you’ve got lenders out there that, let’s say, we’re depositing into a private pension. They’ll use the profits, so to speak, of the amount of the. They’ll use the figures from the profits pre the investment into the pension right as a private pension. How about does the same logic apply? Are there any lenders that do that for the NHS pension, as in are gross before we make our contributions to the NHS pension.
Sarah:
Pension contributions. If you’re NHS, those earnings will typically not go through your limited company, so that will be sole trader or partnership income. So that will show on your tax return and that’s how we have a good that income. And then that lenders will typically ignore your pension contributions. Some lenders do take it into account but that’s because it’s not mandatory. There’s the argument that you can stop those contributions at any point, so typically they’re not taken into account. Now if your limited company, which is your private earnings, if you make pension contributions via that, well then that does come off your profit Before we we sort of derive to your net profit figure. So that does have an impact.
Dr James:
Thank you.
Sarah:
Once we go specialist lender, that will add your pension back in.
Dr James:
Cool, cool. And that’s only really in the situation where you can get, you can convince your principal to pay your. Nhs pay separately and your private payment with a limited company. That would be in the situation that we’re doing both of those things together, or you can apply the logic separately and individually as well.
Sarah:
Yeah, all we have principles that you know, that sort of partnership or sole trader. Their NHS income goes through partnership with sole trader and then limited company goes into. Their private earnings go into the limited company. So, yeah, you know, we have quite a lot of that where you’ve got a mixture of the two.
Dr James:
There’s layers to this. This looks simple from the outside, looking in like most things, but there’s actually layers to this, which has been fascinating. I want to ask one more thing. What was the thing that was in my head? Oh yeah, well, first of all, I just wanted to pause out because I was just it’s just in my nature to just take things to the extreme and just figure out all the permutations, which is kind of where I was going on that. But then again I wanted to give as much value as possible on the podcast, which is hyper useful. So it came back to me. The thing that I wanted to ask I’ve heard and I’ve seen this thrown around a few times that really it’s a good idea to get maybe like two years of accounts before we think about going limited from the point of view that we can get a better rate on our mortgage.
Sarah:
What do you think about that, sarah? No, no, yeah, are you sure, sarah, are you sure?
Dr James:
you didn’t sound certain, then yeah, no, I’m kidding. No, absolutely not, yeah.
Sarah:
You’re not speaking to the right mortgage fund. Yeah Boom, yeah, yeah Two, you know, if you want to have the choice of the whole of the market. I would say, yeah, two years. But you know we’ve got really good high street, really recognisable names that work up one year. We’ve also got lenders that I found another lender yesterday where I’ve got somebody that’s gone from Soul Trader to Limited Company and they don’t even need to have one year’s trading in the new entity, they will just work off their Soul Trader figures that we’ve got. So you know, if you want to have the choice of the market, yes, but there are always options. I would say, speak to a mortgage advisor before doing something and you know we can talk to your accountants as well and work out between us. But you know, if you’re going to say we’re shed loading tax, well you know it’s having a 0.1, 0.2, 0.3% on your rate. It’s only going to make that sort of amount of difference.
Dr James:
Boom. Thank you for that, sarah. So, in other words, it’s certainly worth, it’s possible and it can certainly be worth exploring, but it sounds like the sort of thing you want to have a conversation about, really. Yeah, and on that note, sarah, you’ve been really, really, really generous with your time today on the Dental Invest podcast. I was wondering if anybody out there listening wants to find out more about yourself. Where can they find you? Right?
Sarah:
So we’re wwwsarah that’s the little minus sign, gracecouk and we’ve got our website there. Or I am in the Dental Invest Sarah Grace, I’m on that group as well, so you can message me through that.
Dr James:
Cool, all right top stuff. Well, listen, sarah. Once again, thanks so much for your time. Looking forward to having you back on the podcast. Very soon.
Sarah:
Yeah, no, thank you, James.