If you are a director of a limited company, you may have found that some mortgage brokers are not too sure about the specific details involved in applying for a mortgage, particularly regarding how they should interpret your income and profit.
Our experienced and knowledgeable team of mortgage brokers at PIL Southampton has successfully handled many mortgage applications for limited company directors, and is well equipped to steer you through the mortgage process.
In this article, we answer questions we are commonly asked on this topic.
Absolutely. There are plenty of specialist lenders and some well-known high street names who offer mortgages to limited company directors.
How big a mortgage you can get will depend on your company’s profit before or after taxation, or your dividends and your director’s remuneration. Some lenders will offer up to 5.5 times your annual income, but most cap their lending at 4.5 times your annual income.
You will be able to apply for the same mortgages as any employed or self-employed individual. It is worth noting, however, that lenders will treat you differently to these other categories of applicants as your more complex financial situation will mean that they will need more information from you.
It is really important that you use a mortgage broker who really understands how limited company finances work. This way, they can make sure that your application clearly reflects your position.
A mortgage broker who is experienced in this area will also know the right lenders to apply to, who will have products suitable for your circumstances and who will be flexible regarding how they assess your income.
Just like any other mortgage borrower, if you pass the test regarding affordability and you have a good credit history, you should be able to get the maximum loan-to-value (LTV) 95% ratio.
However, as with all mortgage applications, if you can provide a 15-30% deposit and you have a good credit history, this will give you access to the lowest interest rates and the most favourable and flexible terms.
If you have limited trading history or poor credit history, you may be asked to provide a larger deposit.
Most lenders will use the salary you take from the business, known as ‘remuneration’, coupled with the dividends that you receive from the business or your share of the company’s net profit. With dividends, your lender will look at one year’s personal tax calculations or the average of the last two years of personal tax calculations.
As a lot of lenders will only take into account the income you have withdrawn from the business – your salary and dividends – and not the rest of the profit made from your company, if you need to maximise the amount you can borrow you need to look for a specialist lender who will consider your share of the company’s net profit. This can make a huge difference to the size of mortgage you can potentially get approved for.
The fact that, in many cases, lenders ask to see financial information for your company dating back over two years can make it tricky for some company directors. For example:
Yes, some specialist lenders will calculate your mortgage offer based on the retained profits that are available to you as a limited company director.
They will look at your tax accounts, usually over the previous two to three years, to confirm that you have earned the amount of profit you have declared to have earned.
Your affordability will usually be worked out by calculating the total amount of your net profit, and multiplying that between four and five times.
If you have had a particularly good year, your lender may take the highest figure over the past three years, rather than taking an average over that period, which could allow you to borrow a significantly higher figure.
To maximise your chance of the highest possible income multiplier, you need to have an excellent credit rating, so it’s worth bearing this in mind in the months leading up to your mortgage application. Make sure that you keep your credit report up to date, and that you never miss any payments or make late payments.
You can prove your income with your limited company accounts, as they will show your operating profit before and after tax. You can also demonstrate your income using your director’s remuneration and your personal tax calculation (SA302). Generally speaking, these documents will need to be less than 18 months old. Lenders may also ask to see your last three months’ bank statements to help to verify your income.
If you have been trading for less than one year, it is unlikely that a lender will give you a mortgage, however they may make an exception if you have written proof of a future contract, or if your business has changed status from a sole trader to a limited company for tax reasons.
A limited company that has been trading for over 12 months will have more options for mortgages available to them, but some lenders will want to see a full two years of accounts.
Once you have traded for over two years, most mortgage options should be open to you, subject to the usual credit checks, affordability checks and any other eligibility criteria.
You could have been self-employed, running your business for 20 years but, if you change your business to a limited company, a lender could review your mortgage application as if you are a brand new business!
This could be particularly frustrating if you have only been trading as a limited company for six months and a lender asks to see more than one year of your company’s accounts.
However, some lenders will be happy to assess how much you can afford to borrow in other ways, for example taking an average of your last two years’ income, or your lowest annual income over the last two years, or your most recent year’s income.
They will also want to see evidence that you have worked in the same line of work for a reasonable period of time, i.e. at least three years, and at least two years’ trading history before you became a limited company.
You may also be asked for an accountant’s certificate (this isn’t the same as certified accounts!). It vouches for your level of income and gives an indication of your current year’s projected earnings.
Typically, if you have at least a 25% (or, in some cases, 20%) share in a limited company you are treated as self-employed and therefore your dividend earnings will be taken into account as part of your mortgage application.
Less than a 20-25% share will probably mean that a lender will treat you as PAYE and ask for a record of your payslips – this could be a request for anything from one to 12 pay slips.
If you are close to the 20/25% threshold, your lender may subject your application to further scrutiny.
Your trading history can affect how lenders will review your mortgage application.
It can be more challenging to get a mortgage offer if your limited company has made a loss in the last three years, due to the increased risk of income instability. However, there will still be specialist lenders who are understanding of the financial fluctuations that companies sometimes go through, especially in their younger years and, if your losses are older than two years and you have evidence that your company has made a recovery, you can still be successful with your mortgage application.
Lenders are likely to calculate an average income over the last three years, to balance out fluctuations.
Yes, there are lenders who will accept figures only from your latest limited company accounting year, your profits from your latest tax year, or use dividends from your latest tax year.
You might find the remortgage application process a little more complicated if you weren’t a company director when you took out your original mortgage but don’t worry, the same process applies regarding proving affordability and eligibility.
And, if you have reasonable equity and profit levels, you should still be able to get a competitive rate.
Note: If your affordability criteria is lower than it might be, because you are paying yourself less to reduce the amount of tax you pay, it might mean that you are not in a position to remortgage with a new lender and you could instead talk to your current lender about a product switch.
If you are looking to raise money to reinvest into your company, or to consolidate a business debt, you might be able to use the equity in a property you own as security for the remortgage.
Be warned though, that lenders will have criteria that won’t allow them to approve a remortgage if the capital is to be used for financing a startup, purchasing stock and shares, paying a tax bill or repaying gambling debts.
And, of course, you should always think very carefully before signing up to any deal like this. There is a risk that you could lose your home if you have used it as security for your mortgage and you fail to keep up the mortgage payments.
Our specialist team of mortgage brokers has a lot of experience in arranging mortgages for directors of limited companies and we understand the complexities of these particular mortgage deals.
Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.