In order to leave cash in the business, your company accountant will probably have told you to take your salary up to the tax-free threshold and then take dividends for any other income.
Because of this, most lenders will consider your income as being the actual drawings from business. So, if your company has made a profit of £100k and you have paid yourself £20k through salary and dividends, lenders will look at your income to be £20k.
This is where mortgage applications can fall down as most lenders will look at it this way, which is way it’s important that you speak to a broker who has access to the alternative lenders.
The tax liability is lower on mortgages and dividend income than on earned income through a salary or taxed net profit, which means you are left with more money ‘in your pocket’ at the end of the month.
If you’re looking to borrow the maximum company director loan amount, this is important, as lenders can work out the dividends to show a higher affordability.
Will I need to prove my income?
Yes. All lenders require evidence of income, though it can be asked for in different forms.
It varies from lender to lender, but you will definitely need your finalised accounts, your SA302 or accountant’s reference and will usually need your latest three months business and personal bank statements.
What if I’ve recently made a loss?
If you’ve declared a loss in the last three years it can be difficult to attract a high street lender, as they will look at you as a risky prospect.
There are specialists out there, but if you have a declared a loss in your most recent year then, unless your salary is deducted before profits or you have a satisfactory explanation, it’s highly unlikely that you’ll get approved.
If the loss was two years ago and you have made a recovery since, you are more likely, and if the loss was three years ago with a three-year trend of recovery, there are several specialist lenders who’ll consider you.
I’ve just changed my trading style…
If you’ve recently changed your trading style and don’t have a full year’s trading under your new style
then finding a mortgage can seem difficult, as most lenders will look at it as a new business – requiring the standard 1-3 years’ accounts to establish your income and affordability, even if you’ve been trading for 20 years under your old style.
However, there are certainly lenders that will look at your previous business style as evidence of income, despite the fact that it will have ceased trading.
If you’re self-employed and looking for a mortgage, you can find out how your dividend income will affect your application by speaking to one of our expert advisers, who will be able to help you with the next steps.