As a limited company director seeking a mortgage or remortgage, it’s essential to understand how your income structure impacts your borrowing capacity. Lenders generally view self-employed company directors as higher risk, so there’s a whole lot more paperwork involved in getting a mortgage compared to an employed applicant.
For self-employed mortgages, lenders ask for evidence of the financial health of your company and require documents like business accounts, tax returns, tax calculations (SA302) and tax year overviews. A mortgage broker can help to compile your application and find the most appropriate lenders.
Navigating mortgages as a company director can be complicated and a real drain on your time. So we have put together this helpful guide on how lenders will assess your self-employed income, what documents you need to submit and how you can increase your chances of approval.
To talk to a specialist mortgage broker about applying for a mortgage as a company director, please get in touch with The Mortgage Pod.
How will my income as a limited company director affect how much I can borrow?
Most mortgage lenders prefer things to be black and white when it comes to assessing applicants, and proof of a steady income is high on their list. But what about company directors whose income structure isn’t quite so straightforward? Unlike salaried employees, your income may be more complex and come from various sources such as net company profit, a director’s salary, dividends, and company retained profit.
The good news is that you still have plenty of options. You just need to understand how your income will affect your borrowing capacity and which lenders to approach.
Let’s take a look at how mortgage lenders scrutinise self-employed income streams and how you can best prepare.
Limited company directors’ income breakdown
Lenders have different ways of assessing the annual income of limited company directors. Understanding the various factors they consider and the calculations they use can help you achieve the maximum loan amount and improve your chances of being approved.
First, let’s take a look at the different income types.
The majority of company directors pay themselves an annual salary. Many choose to keep this low and combine it with dividend income for income tax purposes. Whatever your salary is, it will most certainly be used by all lenders in their affordability calculations.
Most mortgage companies consider dividend income along with a salary within their annual income calculations and typically take an average from the previous two years.
Some specialist lenders factor in a director’s share of their company’s net profit instead of dividend payments. This often leads to a more favourable outcome, as it’s unusual for directors to draw 100% of the company’s profit in the form of dividends, meaning there is more profit available.
Lenders that consider a director’s share of a company’s net profits make their calculations in one of two ways:
- Profit AFTER corporation tax – Most lenders who are comfortable assessing a company’s net profit rather than dividends will work from its profit after any corporation tax liability has been deducted.
- Profit BEFORE corporation tax – If your company accounts have been prepared by a suitably qualified accountant, then some lenders will consider your share of the company profits before corporation tax, therefore increasing the maximum loan amount.
Retained profits are a portion of a company’s net profit that is not distributed to shareholders or taken as dividends. Instead, these earnings are reinvested back into the company for various purposes, such as business expansion, debt reduction, or building reserves.
Retained profits represent the accumulated profits that a company has retained over time and are a key indicator of your company’s financial health.
Some lenders may factor retained profits into their assessment of a borrower’s income, boosting the maximum loan amount further.
How do lenders calculate self-employed income?
Take a look at the following example that shows how lenders assess annual income, which can significantly affect how much you can borrow:
- John is the sole director of his company and owns 100% of the shares
- The company makes £100,000 profit before corporation tax (£77,250 net profit after corporation tax)
- He takes £12,000 director salary
- He also takes £70,000 in dividends
Now let’s look at how different lenders might assess John’s affordability:
- Salary plus dividends – the lender will offer a mortgage based on an annual income of £82,000. If the applicant is eligible for 4.5x income, this means a maximum mortgage of £369,000.
- Net profit AFTER corporation tax – the lender will offer a mortgage based on an annual income of £89,250. If the applicant is eligible for 4.5x income, this means a maximum mortgage of £401,625.
- Net profit BEFORE corporation tax – the lender will offer a mortgage based on an annual income of £112,000. If the applicant is eligible for 4.5x income, this means a maximum mortgage of £504,000.
This scenario is for illustration purposes only. The Mortgage Pod is not authorised to and does not provide any tax advice.
It’s clear that knowing which lenders to approach can significantly increase the amount you may be able to borrow. However, taking the maximum loan amount might not always be advisable. That’s where the advice of mortgage brokers can be very valuable.
What happens if my company hasn’t been trading long?
Many high street lenders require two to three years of limited company accounts when lending to company directors. So, if you have a limited trading history, you may find you have fewer mortgage options.
You may also be subject to a maximum loan to value, but there are a few things you can do to improve your chances:
- Offer a larger deposit – it may be worthwhile waiting until you have built up a more significant deposit
- Check your credit file to ensure everything is in order – you can also check your credit file with the 4 main credit agencies
- Approach a specialist mortgage provider – some consider mortgage applications based on one year’s accounts only. You will likely have to use a mortgage broker for this, as some deals aren’t directly accessible to borrowers. You can see more information on this here.
Get in touch with The Mortgage Pod, specialists in mortgages for company directors
Our friendly team here at The Mortgage Pod specialise in securing mortgages for limited company directors. We know how hard small business owners work, and we believe that they deserve favourable treatment by lenders.
We have access to a large number of mortgage providers from across the whole mortgage market, including specialist and mainstream lenders. We can help you to select the right mortgage lender for your circumstances to give you a greater chance of getting your mortgage approved.
Oh, and we’ll take care of the mortgage application to allow you to get back to what you do best – running your business.
To contact our team today, just tell us what you would like to do.
Key points to take away
As a limited company director looking to secure a first-time buyer mortgage, home movers mortgage or remortgage, understanding the requirements of different lenders is crucial to maximising the amount you can borrow and your chances of approval.
Lenders calculate annual income in different ways, based on salary, dividends, net profits and retained profits, which can significantly affect the amount you can borrow.
Proving income as a limited company director for a mortgage is also more complicated than for an employed person. There’s a lot more paperwork involved, so the services of an independent mortgage advisor can be very valuable.
Frequently asked questions about limited company director mortgages
Do I need to use a specialist lender as a company director?
Not necessarily. If your income is relatively stable and your company is in good financial health, you will also have access to a wide range of deals from mainstream mortgage lenders.
There aren’t lenders that specialise in mortgages for limited company director mortgages as such. However, some specialist lenders are geared towards lending to the self-employed and will look upon applications more favourably than a typical high street lender.
This is especially important if you are seeking a mortgage with bad credit or if your company is not making a profit, for example.
Can I get a mortgage if my company isn’t making a profit?
Lenders typically assess mortgage applicants based on their income and financial stability, and the financial health of your business plays a significant role. So, securing a mortgage when your company isn’t making a profit can be challenging – but it’s not impossible.
If you have a steady income from another source, that can help sway more traditional lenders. However, there are specialist lenders that will take a more empathetic view and may even factor in future income if it is well-evidenced by a business plan or a new contract, for example.