As a self-employed barrister, your income can vary significantly, influenced by case timings, the nature of your work, and the accounting methods you employ. These fluctuations, while common in the profession, can pose unique challenges when it comes to major financial decisions like securing a mortgage. Understanding how your income patterns impact mortgage applications is crucial to presenting a strong financial profile to lenders.
In this article, we’ll break down the key factors affecting barristers’ income, explore how different accounting methods can shape your financial presentation, and provide guidance on overcoming potential hurdles to obtaining a mortgage. With the right approach, you can navigate these complexities and present a clearer picture of your earning potential, making it easier to secure the mortgage you need.
The Impact of Income Fluctuations
As a barrister, income fluctuations can arise due to various factors, including the nature of the work and the accounting methods used. The way income is reported can significantly affect how it appears on paper. For instance, your income might seem lower than it actually is when comparing accrual accounting to cash accounting periods. This discrepancy occurs because accrual accounting recognises income when it is earned, whereas cash accounting recognises it when it is received. As a result, the timing of income recognition can cause significant variations in reported earnings.
Nuances of Accounting Periods
To delve deeper, we must consider how the nuances of accounting periods affect a barrister’s financial presentation. Accrual accounting, which records income when it is earned, may show a barrister’s income more evenly over time, smoothing out the peaks and troughs. However, it might also capture earnings that have not yet been received in cash, which can present liquidity issues. On the other hand, cash accounting shows actual cash flow, highlighting periods of high and low earnings more starkly. This method may more accurately reflect the barrister’s immediate financial reality but might not give the best picture of their earning potential over the longer term.
The choice between these accounting methods becomes particularly relevant when applying for a mortgage. Lenders often prefer to see stable and predictable income patterns, which can be difficult to demonstrate with cash accounting if income is irregular. In contrast, accrual accounting can sometimes present a more favourable view of income stability, but it requires careful management to ensure it aligns with your actual cash flow.
Tax Calculations vs Accounts
These variations have broader implications, not just for tax purposes but also for other financial considerations, such as obtaining a mortgage. Mortgage lenders typically assess income to determine how much they can lend. If a barrister’s income appears lower due to the accounting method used, it might affect the amount of mortgage they can qualify for. This makes the choice between accrual and cash accounting an important decision with substantial financial consequences.
Because of the complexity and potential implications of these accounting methods, it is crucial for sole traders, including barristers, to consult with a mortgage adviser. An adviser who understands the intricacies of accounting for self-employed individuals can provide valuable guidance. They can help ensure that the income figures presented for mortgage applications accurately reflect your true earning potential, which can be the difference between securing a loan and facing rejection.
Ebbs and Flows of Practice
Like many other professions, the practice of law experiences its own set of ebbs and flows. Various factors can cause genuine fluctuations in income. For instance, as a barrister, you might take a career break for reasons such as maternity or paternity leave, or other personal circumstances. Such breaks can lead to a significant decrease in income, followed by a sharp increase upon your return to full-time practice. These fluctuations are normal but can complicate mortgages and financial planning.
In scenarios where a higher borrowing amount is necessary, it becomes even more critical to work with a lender who understands the unique nature of a barrister’s income. Such a lender will be able to recognise that a dip in income due to a career break is a one-off event rather than a sign of financial instability. They should be able to disregard that particular year when assessing your overall financial health and loan eligibility.
Do you require assistance navigating a mortgage as a barrister?
Our expert advice will guide you through these complexities, helping you present a compelling financial picture that reflects your true earning potential.
To learn more about how your income across various career stages can be strategically presented to secure a more competitive mortgage rate as a barrister, take a look at our video below, or do not hesitate to get in touch for personalised advice.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Please also note: The Financial Conduct Authority does not regulate most forms of buy to let mortgage.
