Mortgages for Company Directors

Although it is commonly assumed that mortgages for directors are among the easiest to obtain, in some instances it can be tricky to convince lenders that self-employed borrowers are not inherently high risk. Additionally, some self-employed individuals use legal strategies to minimise their earnings and reduce tax bills, which is something that can have negative implications when it comes to applying for a mortgage. Interestingly and at times frustratingly, these factors mean that it is not uncommon to see employees speeding through the same mortgage approval processes their directors are struggling to navigate.

Lending Criteria, Tests and Assessments

The criteria and assessments that lenders utilise for self-employed applicants can vary considerably. Not only does each lender have its own set of lending criteria but every business has its own unique journey and story that will be taken into consideration during the application process.

 Your business might, for example, have only have been trading for a year. Or perhaps the vast majority of your company’s profits are tied up in the structures of the business itself. These decisions might make perfect business sense but they could prohibit you from successfully obtaining a mortgage, at least in the short term.

Not Always a Straightforward Process

Some lenders will only consider approving mortgages for directors of businesses that have been trading successfully for more than three years. Others might provide more leeway in this area but won’t consider directors of businesses with retained profits. As you can see, this process is by no means a straightforward one and obtaining advice from a broker with specialist knowledge will help you to navigate through every aspect of your application. Here is a little more information on some of the factors that could affect your mortgage application as a company director.

How long has your business been actively trading?

Unsurprisingly, the trading history of your business is one of the first things that every potential lender will look at when they are assessing your application. Remember, lenders make their decisions based on risk and this often means that your mortgage application will look stronger if your business has been trading for a significant amount of time.

Trading time of less than a year

If your business has been trading for less than a year, you will probably struggle to obtain a mortgage from most lenders. It is usually only possible to make a successful application in these circumstances if you can also demonstrate contracts that clearly outline future income.

Trading time of 1-2 years

If you have been in business for a year, you should have at least a year’s worth of accounts to include with your application. It is, however, important to note that as the tax year begins and ends in April of every year, your first set of accounts will likely span two tax years. Unfortunately, if you find yourself in this situation, not all mortgage lenders will consider your application. Some lenders will ask you to wait until your second tax year accounts have been filed but don’t get disheartened because there are some lenders who won’t automatically make you wait.

Trading time of more than 2 years

Provided that the rest of your application is also in order, most lenders will probably consider you for a mortgage if you can provide several years of accounts. If your trading figures illustrate that the size of the mortgage you wish to obtain is affordable for you, you shouldn’t run into too many hiccups with your application with most lenders.

How much of a deposit will I need?

Every self-employed mortgage is assessed on an individual basis, which means that the deposit you will be required to make can vary considerably.

Deposits for applicants with good credit

If you can produce several years of accounts and have a strong credit history, you might only need to make a 5% deposit on a residential property. It is important to remember here that this is subject to both your ability to pass affordability checks and your requested loan to value (LTV) but although directors can find it harder to find a lender initially, you should still have access to the same or similar deals as every other applicant.

Higher deposits often equate to better deals

If you have the means to make a higher deposit, your LTV will be lower and your application will look much stronger. In addition to having a wider range of lenders to choose from, a lower LTV should also unlock some excellent rates. Making a 15% deposit can help you to secure a good deal and making a substantial deposit of around 40% will help you to obtain the best rates of the moment.

Deposits for applicants with poor credit

If your credit history isn’t in the best shape or you cannot produce several years of trading evidence, then you might be required to make a deposit of at least 20% to obtain a mortgage.

How much will I be able to borrow?

Lenders have always assessed the maximum amount they will lend based upon the income of the applicants, but now they are required (by the industry regulator) to look at outgoings to measure the affordability of the product they are offering. Although this article is intended for company directors, we think it is important to provide an overview of how the mortgage market currently stands.

Employed mortgage applicants

Employed applicants with good credit will generally be permitted to borrow up to 5x their annual income. This is reduced to 4x their annual income for applicants with poor credit. When lenders asses self-employed applicants, however, the affordability tests used often vary dramatically.

Sole trader mortgage applicants

Lenders assess sole trader applicants based upon their net profit. Sole traders often find it tricky to obtain a mortgage because their tax returns usually show the lowest possible legal net profit to reduce their tax bill. Sole traders could demonstrate a large turnover but lenders will not be swayed by anything other than net profit.

Limited company director mortgage applicants

Lenders will generally assess the income of a company director based upon the salary they choose to take out of the business. Additionally, most lenders will also look at any shares of net profits and/or dividends. This is because they recognise that directors are often advised to take home a base salary that sits under the relevant tax band and take any further income by drawing dividends.

 Many directors choose to leave profits in the business to finance future expansions and pay less tax. The disadvantage of doing this in regard to obtaining a mortgage is that if your business makes a £100,000 profit and you only take a £20,000 salary, most lenders will ignore the profit figure and base their assessment solely on your £20,000 salary. Although the reality is that directors in this situation wouldn’t struggle to meet their monthly mortgage payments, many lenders simply won’t consider profit information when they are making their affordability assessments.

Mortgage applicants with retained profits in a limited company

As most lenders will not consider retained profits, approaching a specialist lender will likely be your best option if you are in this situation. If, for example, your business is making a £100,000 profit, specialist lenders might consider you for a £500,000 mortgage. As most other lenders would only look at your £20,000 salary, they would likely only be able to offer you a £100,000 loan. Although your financial situation would technically be the same in both circumstances, the difference between the amounts you would be permitted to borrow is clear to see.

Proof of income

As you are self-employed, all lenders will ask you to provide documentation proving your income. This documentation can include:

  • SA302, which can be obtained from HMRC
  • Bank statements from the last 3 months
  • Finalised accounts from a qualified accountant
Some lenders will ask to see all of the above, whereas others might only need to see one or two. The vast majority of lenders will ask to see your SA302 forms, which can be requested from HMRC via post or downloaded from your online assessment account.

Mortgage applications from company directors with poor credit

Poor credit comes in many forms but unfortunately, mortgages for directors in this situation can be extremely difficult to obtain. There are however specialist lenders who will consider poor credit applicants but success will ultimately depend on the severity of the credit issues concerned.

Late payments

Late payments are generally viewed as mild credit issues and even if problems have occurred within the last twelve months, this shouldn’t have too much of an impact on your application.

CCJs

Most lenders view CCJs as a moderate to high risk factor. If the CCJ occurred in the last twelve months but for an amount under £1,000, you should still be able to secure a mortgage successfully. Any recent CCJs over £1,000, however, could affect your ability to obtain a mortgage, even from a specialist lender. The good news is that most CCJs of less than £2,500 will be accepted by most lenders provided that they were registered more than twelve months ago. CCJs registered more than two years ago will not have much of an impact on your application with many lenders.

Defaults

Although defaults are another moderate to high risk factor, if the event or events occurred in the last twelve months and were for a total amount under £1,500, your mortgage application has a good chance of being approved. Recent defaults of over £1,500, however, can reduce your chances of obtaining a mortgage from most lenders. Defaults older than twelve months should not prove to be a mortgage restriction in any way, especially if you can demonstrate that you have been financially responsible following the event.

Debt management plans (DMPs)

Lenders can view DMPs very differently. Some will consider them to be a high-risk factor, whereas others will recognise that you have taken responsibility for your debts. If you have an active DMP, this will impact your monthly outgoings and might mean that you need to reduce your LTV. There are specialist lenders who will consider DMP applicants, so it is still very much possible to obtain a mortgage successfully in these circumstances.

IVAs

Most lenders view IVAs as a high-risk factor and if your IVA ended within the last year, you might find it almost impossible to obtain a mortgage. A considerable deposit might make lenders look upon your application more favourably, however you should always obtain independent advice from an experienced advisor before submitting your application. Applications from individuals with IVAs settled more than twelve months ago will generally need to be accompanied by a sizeable deposit of at least 20%. If your IVA was settled more than six years ago, obtaining a mortgage should be relatively straightforward as most credit checks will only look at the previous six years.

Bankruptcy

Bankruptcy is one of the most severe forms of poor credit but as every case is unique, lenders will likely want to know the details of your bankruptcy and will make their decisions accordingly. It is still possible to obtain a mortgage in these circumstances, however, you might need to be prepared to make a deposit of at least 25%.

Loss-making companies

If your business has filed a loss in the last three years, you might find it tricky to find a lender who will approve you for a mortgage. If your company loss occurred two or three years ago and you can demonstrate that you have turned a profit in the years following, some specialist lenders might consider your application.

If your company loss was attributable to your taking a salary from the business, lenders might overlook this issue. In these circumstances, you will probably need to utilise the expertise of a specialist broker who will be able to explain your circumstances to the underwriter of your application.

Why not contact the specialist team here at The Mortgage Hut. We will work hard to achieve the best possible outcome and mortgage offer for you, whatever your circumstances.

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