If you are a business owner who hasn’t withdrawn all of the profits from your business, but have instead retained these profits within the business and are looking for a mortgage, it can be difficult as some lenders do not look at retained profits with income.
Generally, high street lenders look at a business owner’s dividend income on top of their salary to calculate their affordability. However, if you have retained profits within the business this could work out at significantly more than your dividend income plus salary, which could mean you could afford to borrow much more.
Why do lenders work like this?
Generally, the argument that lenders put forward is that you should only allowed to borrow money based on the money you personally earned, and not the business.
Most high street lenders operate this way, but there are specialist lenders who will look at retained profits as well, which will increase the amount you can borrow.
If you are a director and 50% shareholder of a limited company with a net profit of £500,000, and you draw a salary of £11,000 per year plus dividends of £40,000 over the last three years, you would be looking at one of two scenarios:
A typical lender would consider your income to be £51,000 per year. Lenders then multiply this figure by four or five times to work out your affordability, so the maximum you will be able to borrow would be £255,000.
A specialist lender would take into account the retained profit within the business, and so your affordability will be based on a minimum of £250,000, which, when multiplied, would mean you could borrow a minimum of £1,000,000!
For advice on getting a mortgage with retained profits, speak to one of our expert advisers who will be able to help you with the next steps.