Limited Company Director Mortgages Explained
If you’re a Limited Company Director, where do you go for the right mortgage advice? Knowing a little bit more about the scenarios around this particular type of mortgage and how banks and mortgage lenders asses your criteria will help you to understand more about our advice service and how we can help you.
So how can a Limited Company Director get a mortgage?
Limited Company Directors can get a mortgage based on their PAYE or Dividend Income, and also on net profit. Specialist mortgage brokers can assist where trading history is minimal, profit has fluctuated, or the trading situation is particularly complex. Anything from one year’s accounts upwards is doable. We can help where:-
- Income comes mainly from dividends
- Profit is retained within the business
- SA302s are not available
- There is a limited trading history
- There are multiple limited company directorships
In fact, whatever the issue, we can usually assist limited company directors with their mortgage needs.
What qualifies you as a Limited company director?
If you run your business as a limited company, you will usually have a shareholding in that business.
If you do not have a shareholding but are still a company director, the lender considers you an employee – in fact, some mortgage lenders will underwrite you as an employee if you own less than 25% of the limited company.
If you have shares in the limited company, the lender will want to see the accounts of the business and will be interested in the income you derive from the business and in what form it comes to you.
Can I count my PAYE Income?
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 start.
What are Dividends?
Dividends are a share of limited company profits paid to shareholders by the company on the advice of the board. In a smaller limited company, the ‘Board’ 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 considered as part of the directors income by most, but not all, mortgage lenders.
What is net profit?
If a limited company makes a level of profit which is not taken out as dividends by the shareholders, this is known as net profit (as it is retained within the business).
Mortgage Lenders can be particularly cagey about using net profit to support a mortgage application from a company director. The view is that the net profit, has not been declared as a dividend and a difficult trading period for the business could see it swallowed up and not available to the shareholder or director as income.
Mortgage Underwriting and net profit explained.
A handful of mortgage lenders will consider PAYE, dividends, and net profit from a company director when underwriting a mortgage – however, each lender’s approach to this differs.
The majority consider net 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 net profit before tax which is clearly the most flexible and useful approach.
Proving your income for a mortgage.
Limited companies will use the services of an accountant. Lender’s 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 a lender and known as an ‘accountant’s certificate’. The accountant’s certificate will usually ask for PAYE and dividends received, with figures required for the past three trading years. Even if a mortgage lender does not consider net profit in its 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 dropping profits, the alarm bells will ring and it could affect your ability to raise a mortgage.
If you are not prompt in putting your accounts together or submitting your tax returns this can cause an issue. Mortgage lenders need the most recent provable period of trading profit to have ended within the past 18 months.
Fluctuating profit and income – does it matter?
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 on application.
A sudden and marked rise in profits can sometimes be more of a hindrance than a help to a mortgage application.
Most lenders will take a two or three year average when calculating accessible income and this is not always helpful to the applicant.
It’s imperative you get the right advice on your mortgage application if profit / income fluctuation may apply to you, so make sure you speak to one of our professional advisors today.
Deposits from company funds – can it affect my mortgage?
If your deposit money is coming from net profit held in the form of cash within the business, be aware that this can potentially be an issue for some lenders. Again, it’s down to you getting the right advice and submitting the correct information along with your application.
For example, it may be permissible by some lenders for your accountant to confirmed that the loss of the funds will not affect the ability of the business to trade effectively.
Always use a professional to make your mortgage application.
A limited company director is not a simple applicant for a mortgage lender to consider due to the considerations listed above. Therefore we recommend you do not approach lenders direct.
If you approach the wrong mortgage lender you could waste time, money, and put credit searches on your record unnecessarily.
For this reason, you should ask an independent mortgage broker to help you arrange your mortgage, and one that specialises in assisting the self-employed.
If you need a limited company director mortgage or re-mortgage – contact us now, and let our professional team of advisors help put you on the right path.