There are estimated to be 700,000 directors of limited companies in the UK and being a director can bring some extra challenges when it comes to mortgages.
The mainstream ‘High Street’ lenders tend not to fully understand the more complex nature of a directors income. But there are plenty of other lenders that do understand and want to help.
We know which lenders will accept dividend payments as income and those that acknowledge the function of retained profit.
Please read on to discover how mortgages for business owners work and how to get the right one.
Self-employed mortgages
Why are mortgages for directors more complicated?
As with self-employed people and sole traders, proving your income is generally what makes applying for a mortgage more complicated.
You can’t just handover a P60 and some bank statements to prove your income. It’s likely that your income structure will need to be explained to the lender and then documents will be needed to prove it.
Accountants will generally advise that you take a small salary, just under the national insurance threshold, and then top this up with dividends from the profit.
These payments can be monthly, quarterly or just ad-hoc and the lenders struggle to get this to fit into their model. Also, dividends should only be taken out if you actually need the money, otherwise they are left in the business as retained profits.
Unbelievably, some lenders still do not understand what being a business owner or company director means in terms of your income over a 12 month period. This causes frustration and confusion for both parties. In this situation it’s probably the choice of lender that was wrong.
Some lenders just don’t ‘get’ the self-employed!
But do not despair, there are lots of lenders that do understand and do want your business.
The two types of company director
In the eyes of a lender there are two different types of company director. Each is treated very differently from the other and this depends on the amount of shares you own in the business.
0-24% shareholding
If you own no shares, or less than 25% of the company, you will normally be treated as an employee and not a director for the purposes of the mortgage. This is because you do not have a controlling share of the business.
25-100% shareholding
With share ownership of 25% or more the lenders will assess you as being self-employed. You will have a controlling influence over the performance of the business and this directly affects your future income and the stability of the company.
Why Drake Mortgages?
Drake Mortgages is an experienced and trusted whole of market mortgage broker who can help clients to secure a director’s mortgage.
We have access to lenders who understand how limited companies work and can look beyond the tax assessment and take a broader view of your income position.
Independent
As an independent whole of market broker we have access to a wealth of mortgage options.
Expert
Our expert mortgage advisors are very experienced in dealing with self-employed directors.
Personal
A friendly, personal service from real people who care about providing great mortgage advice.
Can I get a mortgage if I am a company director?
Yes you can.
Mortgages for limited company directors can seem confusing but are available on competitive terms.
As a share holding director the key to a successful mortgage application is knowing your provable income structure before applying to the lender.
This is where we can help. Your mortgage broker will need to understand your income, how much it is and where it comes from. Many self-employed business owners have multiple streams of income, particularly those within the medical professions such as dentists. Our mortgage brokers can assess the viability and then approach the best lender.
Directors that have no or very little shareholding will be assessed as an employee using payslips, P60 and bank statements.
Mortgage eligibility
Eligibility criteria does differ quite a bit between lenders.
It takes an experienced eye and business knowledge to accurately assess a mortgage application, and some lenders just prefer to take the easy route and only accept the ‘simple’ mortgages.
For self-employed mortgage applicants most lenders will prefer to see 3 full years of trading with accounts. This is the ideal position and gives them the best picture of your income situation.
But we know that this is not always possible. So our advisers can secure deals that are open to directors who have been in business for less than three years.
What is a director mortgage?
If you are a business owner then you are eligible for the same mortgage options as an employee. A Directors mortgage is not a mortgage product, it is the way in which an experienced lender looks at your personal income with the knowledge that you are a shareholding director.
Do dividends count towards a mortgage?
Yes. The majority of lenders will include dividends that you have received from your own business when calculating the maximum loan and mortgage affordability.
What income do lenders accept for directors?
Lenders can often approach this question from a few different angles, not an ideal situation for someone looking to move house. Fortunately we work with specialist lenders who can accept all of the following.
There are potentially three main types of income:
PAYE SALARY
This is usually a relatively low salary, just under the NI threshold, with payments made through the PAYE payroll system. Payments could be monthly or annually. It is also possible to pay a bonus through the PAYE system in addition. This income will all neatly be combined and shown on the annual P60.
PAID DIVIDENDS
By paid dividends we mean money that has actually been paid by the company to you as a share of net profits. By its very nature dividend payments are often ad-hoc and differing amounts as they will flex with the company profitability and cashflow. The timing of a dividend payment can be important for your mortgage application. It is the date of the payment to you that determines what income tax year it is allocated to. Remember that the income tax year (april to april) is different to your company year end date.
RETAINED PROFITS
Retained profits can be thought of as dividends you have not yet received. These figures will be shown within your company accounts as Profit and loss reserves and change each year according to profit made (or lost) and dividends paid out.
If you are eligible to receive a share of the net profit but don’t actually need it the sensible option is to leave it in the company. This is known as retained profit. The profit is still yours and can be accessed in the future, cashflow allowing. By not taking this payment you will be saving some personal income tax.
How much can I borrow?
The answer to this question will depend on whether you have any retained profits to bring in as additional income.
As a guide lenders could look to lend you between 3.5 times and 5 times your overall earnings. The exact figure will vary from lender to lender.
You could achieve a higher loan amount from a lender who will also consider retained profits. This is shown in the table below.
| PAYE ONLY | PAYE + DIVIDEND | PAYE + DIVIDEND + RETAINED | |
|---|---|---|---|
| PAYE Income | £10,000 | £10,000 | £10,000 |
| Paid Dividend Income | £0 | £20,000 | £20,000 |
| Retained Profit | £0 | £0 | £25,000 |
| Possible mortgage using 5x multiplier | £50,000 | £150,000 | £275,000 |
How do I prove my income?
Many potential lenders will ask to see proof of the last three years worth of income. Preferably this will be from Self Assessment tax calculations (SA302), Tax Year Overviews (TYO) from HMRC, or trading accounts.
Lenders may also ask your accountant to complete a certificate confirming your earnings.
Where the accounts or SA302 don’t clearly show the most recent income position they may also ask for recent copies of bank statements, for yourself and the business.
When lenders assess income over a number of years the income used for the mortgage will be an averaged figure. This can cause the loan amount to decrease. Another option may be to approach a lender who looks at the last years income only.
- PAYE information
- SA302
- Tax Year Overview
- Limited Company trading accounts
- Personal bank statements
- Company bank statements
What about bad credit?
This is possible but it depends on how bad the bad credit is. Having a decent deposit and robust proof of income are a must to maximise your chances.
Get your accounts upto date
Although Companies House will allow a business 9 months to file their annual accounts, your prospective lender might want to see them now!
Forward Planning
One of the big financial advantages of running your own business is that you can control your own income and how much tax you pay.
This would normally involve discussing with your accountant when to withdraw profit and ways to reduce the tax you pay. Unfortunately this strategy can work against you when applying for a mortgage as it tends to minimise your income position.
If you know that in 6-12 months time you are likely to move house or need a new mortgage then you can start planning for that now. Speak with your mortgage broker and your accountant to see what adjustments can be made to get your finances in shape.
Mortgage advice for company directors
If your sources of income include dividends along with retained profits then we recommend you approach an experienced whole of market mortgage broker, like ourselves, to help you.
A brokers detailed background knowledge of how lenders think and operate enables them to focus in on the lenders that are best suited to your circumstances.
At Drake Mortgages we have many years of experience in helping business owners get the mortgage they need. Lenders’ attitudes and criteria can differ widely with these types of cases so our whole of market access gives you the widest choice.
Frequently Asked Questions
Proof of income for a mortgage application will need to come from your personal tax returns, SA302’s, and company accounts.
No. Directors will pay the same rate of interest as an employed person who qualifies for the same deal.
In addition to the SA302 and accounts some lenders may also ask for copies of both personal and business bank statements.
All lenders would prefer to see 3 full years of trading accounts. This gives them the best view of the business. However, this is not always possible so there are lenders that will accept less.
With the right lender yes.
Many mortgage lenders are not comfortable using income you have not yet received to justify a mortgage application. But some do understand how a business works and will be happy to include them.
SA302 Tax Calculation forms can be provided by your accountant if they submitted your personal tax return or from the HMRC online self assessment website.
If you operate your dental practice as a Limited Company then you will most likely be one of the shareholders and directors. Mortgages for Dentists are available whether as a sole trader or Company Director.
If a Director owns 25% or more of a company then the mortgage lenders will assess them as being self employed.
Self-certification mortgages were once a popular option for individuals in the UK who were self-employed or had complex income streams. These mortgages allowed borrowers to self-certify their income without providing extensive documentation or proof of earnings.
Read more: Are self cert mortgages still available?