Exclusive: Self-Employed Company Loans Under Mortgage Stress Test - Do You Know?

Understanding Collateral Methods and DSR Calculation for Self-Employed Loans

When considering purchasing a home, mortgage stress testing is an important factor to consider. In this article, we will explore whether self-employed company loans are included in mortgage stress testing.

Firstly, let us understand what a self-employed company loan is. It is a type of loan applied for by a self-employed individual's company to a bank, with the aim of providing funds to expand the business or develop projects. This loan does not require personal collateral as the company itself is the primary debtor.

However, if the self-employed company loan requires the director to act as collateral, i.e., the mortgage applicant guarantees the loan, then the loan must be included in mortgage stress testing. This is because in this situation, the mortgage applicant is assuming the responsibility and risk of the loan, and if the self-employed company loan cannot be repaid, the mortgage applicant may not be able to continue making payments.

Additionally, if the repayment of the self-employed company loan is made through the mortgage applicant's personal account, then this loan should also be included in mortgage stress testing. This is because it means that the mortgage applicant needs to pay both their mortgage and the self-employed company loan, which will increase their financial burden.

Lastly, let us understand the calculation method for Debt Service Ratio (DSR). DSR refers to the ratio of an individual's total debt repayment amount to their total income. The DSR for a mortgage loan should generally not exceed 45%. If the self-employed company loan needs to be included in mortgage stress testing, then the mortgage applicant's DSR will increase accordingly.

In summary, if a self-employed company loan does not require the mortgage applicant to act as collateral and the repayment is not made through the mortgage applicant's personal account, then the loan usually does not need to be included in mortgage stress testing. However, if the self-employed company loan requires the mortgage applicant to act as collateral or the repayment is made through the mortgage applicant's personal account, then the loan should be included in mortgage stress testing.

To avoid problems when applying for a mortgage loan, it is recommended to be cautious when considering a self-employed company loan, understand whether the loan requires the mortgage applicant to act as collateral, and whether the repayment method will affect the results of mortgage stress testing. At the same time, the mortgage applicant should also consider DSR calculations to ensure that their financial situation can withstand the pressure of mortgage repayments.

We hope that this article has helped you understand the issues related to self-employed company loans in mortgage stress testing. Thank you for reading.