Mortgages for limited company directors are easy to obtain if you know where to look! Many self-employed borrowers often struggle to find mortgages and other finance – the reason? Lender policy on income requirements varies widely across the market and can be quite complex, so borrowers declined by banks on the high street turn to brokers for help.
Company director mortgage requirements in particular vary the most from lender-to-lender and the real challenge comes with getting the right broker with the right knowledge and experience! Perhaps your company hasn’t got a long history of trading, or you’re not sure what can count as income or maybe you retained some profit in your company for tax efficiency or investment purposes and need a lender that will consider your share of the retained profits as income.
Whatever your situation is, we will pass you to an advisor that has the right experience and the right expertise in this area to find you the best outcome possible. Hundreds of borrowers come to The Mortgage Hut having been let down elsewhere and, as the company director specialist advisors we train and work with are experts in this field, we are confident that customers will almost certainly get the mortgage they need.
Put simply, you need to have been trading for a minimum of 12 months in order to get a mortgage (the only exception to this is for doctors and other professionals who are potentially eligible with a lesser trading history subject to evidence of contracted future income).
Ideally you will have a full tax year’s set of accounts. However if your trading year spans across 2 tax years (which often is the case) then there are lenders who will consider a rolling 12 months snapshot rather than waiting for you to complete the second tax year’s accounts before applying.
If you receive PAYE (pay as you earn) payments from your limited company, your mortgage lender will consider the gross (before tax) level of those payments as income for mortgage purposes.Many limited company directors are advised by their accountants to take a minimum level of PAYE and most of their income in the form of dividends – this is where the complications arise.
Dividends are a share of a limited company profits paid to shareholders by the company on the advice of the Board. In a smaller limited company, the ‘Board of Directors’ are also typically the shareholders and therefore dividends are a natural way of paying directors income from the business. Dividends are subject to income tax and will be considered as part of the director’s income by most, but not all, mortgage lenders.
If a limited company makes a level of profit which is not taken out as dividends by the shareholders, this is known as retained profit (as it is retained within the business). Mortgage lenders can be particularly cagey about using retained profit to support a mortgage application from a company director. The view is that the retained profit has not been declared as a dividend and a difficult trading period for the business could see it being swallowed up and therefore not always available to the shareholder or director as income.
Mortgage Underwriting and Retained Profit
A handful of mortgage lenders will consider PAYE, dividends and retained profit from a company director when underwriting a mortgage – however, each lender’s approach to this differs. The majority consider retained profit only after tax (Corporation Tax) has been allowed for – this leaves a ‘hole’ of up to 29% in your usable income. There are some lending sources that will consider retained profit before tax which is clearly the most flexible and useful approach.
Proving your income
Limited companies will use the services of an accountant. Lenders will often obtain the information they need to underwrite your mortgage from your accountant. Sometimes your mortgage lender will ask for the last three years’ accounts for the business, occasionally they work on an accountant’s reference or letter. The accountant’s reference needs to be provided on a specific form supplied by lender, known as an ‘accountant’s certificate’. The accountant’s certificate will usually require details of PAYE and dividends received, with figures for the past three trading years. Even if a mortgage lender does not consider retained profit in it’s calculations, it will want to be sure that the level of dividend received by the applicant can be supported by the profit from the business. If lenders see a trend of falling profits, alarm bells will ring and it could affect your ability to raise a mortgage. If you do not have three years’ trading records, many mortgage lenders will not consider your application. Remember, if your business has been trading for less than three years, we have our exclusive self-employed mortgage available.
Fluctuating profit and income
Varying profit and income can add complications to your application. A dip in profits needs to be explained to the lender and handled in the right way in an application. A sudden and marked rise in profits can sometimes be more of a hindrance than a help in a mortgage application. Most lenders will take a two or three year average when calculating assessable income and this is not always helpful to the applicant.
For the most part, eligible company owner borrowers are treated the same as any other borrower in terms of deposit requirements, up to 95% loan to value. Things sometimes change when you use the more specialist lenders because they try to mitigate the increased risk against larger deposits. Typically, with a 15% deposit you will have access to the majority of specialist lenders (there is one specialist lender who will consider a 95% loan to value ratio (LTV) in certain circumstances). If you have adverse credit, the requirement may be more depending on what the issues are and how recent they are.
The Mortgage Hut provide face to face mortgage and insurance advice from our branches across the UK. We can also provide help and advice over the telephone - just give us a call.