Mortgages for directors are usually assessed the same way as self-employed applicants are, as you’re effectively employing yourself in your own business (hence self-employed). Certain lenders can see self-employed borrowers as high risk. It’s also quite common for self-employed individuals to legally minimise earnings is to minimise tax bills, which can often then have obvious drawbacks when applying for a mortgage. It’s often the case where company employees fly through mortgage approval, whereas company directors can find it that much harder.
The assessments and criteria that lenders have for self-employed applicants vary considerably, particularly mortgages for directors. This is because every lender has their own criteria and in addition, every business has its own story. Maybe you’ve only been trading for a year, or the majority of company profits are retained in the business. Some lenders may only consider mortgages for directors who have been trading for three years, and some lenders won’t consider retained profits in a business at all.
That’s where getting specialist advice and help comes in. We’ve written this guide with company directors in mind however, your best chance of success is still to talk to us in person so consider this a helpful guide and remember we have much more advice to give in person.
Does It Matter How Long I’ve Been Trading For?
We’ll always ask you for the length of time you’ve been trading. This is because trading history is one of the biggest things that lenders look for when assessing mortgages for directors. Lenders base their mortgage assessment around risk. The longer you’ve been trading for should in theory make your application stronger.
Less than 1 year –
If you’ve been trading for less than 12 months, but have a fixed term contract in place, some lenders will consider you. If you don’t work on a fixed term contract basis, you will need to have at least 1 year’s trading. If you’re not quite there, but close, it’s still worth talking to us, so you can be prepared.
Between 1-2 years –
If you’ve been trading for one year, you’ll have one years’ worth of accounts at least. As the tax year always starts and finishes in April, the chances are your first year of trading will fall into two different tax years. We can help make sure you’re matched with lenders who will consider you.
2 years or more –
If you have at least two years’ worth of accounts then most lenders will usually consider you for a mortgage (as long as the rest of your application is ok). Having three years’ accounts will however provide you with access to every lender, as long as the affordability, credit check and loan to value all fit your declared income.
How much deposit will I need for a Directors Mortgage?
As each self-employed mortgage is assessed individually, the deposit amount will vary. Generally, if you have clean credit and have been trading for over 2 years then you may only need a 5% deposit for a residential purchase. This is subject to your requested loan amount meeting affordability checks. Although mortgages for directors can be trickier to place, you should have access to the same deals as everybody else.
Higher deposits will mean a lower LTV, which will always make your application stronger. Not only will you have more lenders to choose from, but you should qualify for some great rates. Having a 15% deposit can get you a good deal. Having a very large deposit, such as 30-40%, can ensure you’re getting the best available mortgage rates.
If you need a bad credit mortgage due to poor credit or not enough trading history, then you may need at least a 15-20% deposit.
How much money can I borrow for a directors mortgage?
Lenders will assess your monthly outgoings in addition to your monthly income. This allows lenders to assess if you can actually afford to repay the mortgage on a monthly basis. Although lenders look at your overall financial picture nowadays, they do still look at your income as an initial guideline for the maximum amount you can borrow.
If you have clean credit or even light adverse credit, the general rule of thumb is that you can borrow up to 5x your annual income. If you have adverse credit then you can usually borrow up to 4x your annual income. However, when it comes to assessing income from a self-employed applicant, the affordability tests from lenders vary quite considerably and it’s really worth getting advice from us before you begin your applications.
How exactly do lenders assess my income as a company director?
For limited companies, lenders will assess a director’s income based on the salary they take from the business. Salaries will be considered along with dividends or a share of net profit. Directors are usually advised by their accountants to take a base salary up to the tax-free threshold and then to draw dividends for any further income. As a limited company, a lot of profit is left in the business. This is because directors may want to use the finance to further expand, not to mention paying less tax.
The drawback to this is some lenders will only consider income that is actually withdrawn from the business. If your company made a profit of £100k but you only took £20k through a salary and dividends, then some high street lenders will base your assessment on £20k and the company profit of £100k will be irrelevant. This is the main reason that you need to be speaking to our advisers, so we can advise and apply to lenders based on our knowledge and experience and who may take retained or operating profits into consideration
Will lenders consider my business’ retained profit?
As discussed above, some mainstream lenders won’t consider profit retained in the company. However, there are specialist lenders that will consider company profits retained in a business. This means if you have company profits of £100k, lenders may consider you for a maximum loan of £500k as opposed to net profits of £20k and a maximum loan of £100k.
If you require a larger mortgage amount than your net profit allows you or you’ve been declined, speak to us today. Our expert advisors have access to a substantial amount of lenders, allowing them to source competitive mortgages for directors. As previously discussed, going to a high street lender as a self-employed applicant, isn’t really how you’ll maximise your borrowing potential, especially if you have retained profits in the company and show a low net profit amount.
What documents will I need to provide in order to prove my income?
As you’re effectively self-employed, lenders will ask to see documents to prove your income. Some lenders will ask for more proof than others, so we’ve listed all the possibilities below.
- SA302 (request or download online from HMRC)
- Finalised accounts (spreadsheet or from a qualified accountant)
- Latest 3 months bank statements (personal and business accounts)
- Proof of ID
- Utility bills / proof of address
Can I get a Directors Mortgage if I have Bad Credit?
Mortgages for directors with bad credit will be more restricted, however there are still plenty of options available to you. Adverse credit comes in different shapes and sizes so there isn’t one rule for everyone. Lenders usually assess bad credit issues based on severity and how recent they are. Depending on the severity of your credit, we may need to apply to specialist bad credit lenders – that’s obviously where talking to us to get the proper advice comes in.
What Information is looked at in a Bad Credit Mortgage Application?
Late payments –
Late payments are considered to be light adverse credit issues and shouldn’t affect your mortgage application significantly. Even if you’ve had recent late payments in the last twelve months, securing a mortgage after late payments should be relatively straightforward.
A mortgage with a CCJ is considered to be medium to high risk in the eyes of a lender. If you have a CCJ registered on your credit file in the past twelve months and the amount is less than £1000, then you should be able to secure a mortgage. Most lenders will accept CCJ’s of £2500 or under, as long as they were registered over one year ago.
If your CCJ’s were registered over two years ago, there should be a fair number of lenders you can approach.
Defaults are considered medium to high risk. If you’ve had a recent default in the last twelve months and the amount of the default was less than £1500, then your mortgage application should be approved. If you have a default of over £1500 in the last twelve months, then getting a mortgage will be much more difficult, however a specialist lender may consider you.
Any defaults that took place over one year ago, shouldn’t restrict you in any way. As long as the defaults were over one year ago, the value of any default is irrelevant. If you’ve conducted your financial affairs in a responsible manner, getting a mortgage with a default is highly possible.
Debt Management Plan (DMP) –
A debt management plan can show lenders that you’ve taken some ownership of your debts, which shows some financial responsibility. Debt management plans can be both low and high risk in the eyes of a lender.
There are several specialist lenders who may consider you for a mortgage with a debt management plan, even if your DMP is still active. As debt management plans vary, they’re usually tailored to what your monthly outgoings are. The only difference is, if your DMP means you have high monthly outgoings, then your LTV may need to be lower. If your DMP doesn’t really affect your monthly outgoings in any major way, then you should be able to get a mortgage with a high LTV.
Having an IVA is considered to be severe and high risk for lenders. If your IVA finished within the last twelve months, then you may find it difficult to secure a mortgage. You may need an astronomical deposit to sway the decision of a lender if you find yourself in this position. It’s highly advised to seek the expertise of an advisor before applying for a mortgage after an IVA.
An IVA settled over one year ago will usually require larger deposits of around 20-25% and the chances of mortgage approval do improve. Specialist lenders may accept less if all your payments were made on time during your IVA and it was for a reasonable amount. If IVA’s happened over six years ago, mortgage approval should be straightforward, as most credit agencies go back to six years only. Bear in mind that some lenders will ask applicants to declare any credit issues such as IVA’s. This is why it’s imperative to go to suitable lenders in the first instance.
Bankruptcy is considered to be high risk by lenders, as it’s one of the more severe forms of adverse credit. Every case is unique, so it’s best advised to speak to a specialist advisor regarding your options. With so many variable factors in each case, there isn’t one answer for all.
Getting a mortgage after bankruptcy is still possible, even if it was recent. If your bankruptcy took place in the last three years, then you may require at least a 25% deposit. Placing your application with the right lender is vital in this scenario. If your bankruptcy was registered over three years ago, then you may be able to secure a mortgage with a 10-15% deposit.
What’s important to understand is each lender has their own unique criteria to assess an application. In addition, lenders also assess self-employed applicants using varied criteria. If you have bad credit and also only have accounts for one year or can’t quite meet the requirements of a lender, then you may be restricted. If you’re still unsure, you can make an enquiry with a specialist who can guide you through what you need to do next in order to secure a mortgage.
If my company made a loss, can I still get a Directors Mortgage?
If your company has filed a loss within the last three years then mortgage approval can be hard to come by. High street lenders will most likely decline your application based on being a high-risk applicant. Filing a recent company loss will provide the lender with doubt on whether a mortgage could be repaid, especially if the business appears to be struggling.
If you declared a company loss two or three years ago, but showed a profit since, then specialist lenders may consider you. It helps to have an experienced mortgage adviser on your side who can correctly place your application with the right lender.
If the loss is due to a salary being drawn from the company, lenders may overlook this as you’ve still taken an income. This will require an experienced broker to explain this to the underwriter dealing with the application and may require additional documents to prove this, not to mention a specialist lender.
If I’ve changed my company trading type, can I still get a mortgage?
If you’ve changed your trading type, for example, sole trader to a limited company, then it all depends on when the change took place. If you’ve changed your trading style three or more years ago, then it shouldn’t make any difference when applying for a mortgage. However, if it was in the last three years, then your options will be more restricted but not impossible to facilitate.
This is because lenders will treat your company as new, even though you may have held previous accounts under your old trading style. The majority of lenders will only be interested in your present company and its related accounts. As lenders usually require three years accounts, this is where problems can arise.
In these circumstances, you will more than likely require a specialist lender. Our advisors can take a look at your current situation and advise you on what to do next and if there are any lenders who will consider your application. Some specialist lenders are designed for circumstances involving mortgages for directors, so they will consider accounts under your previous trading style.
Can I get a limited company mortgage using my most recent years’ accounts?
Sometimes accounts filed for certain tax years can be quite low. This may be due to the company’s startup years or it could be that there were unexpected overheads such as an amount spent on marketing or having to hire more employees. This can prove a problem with lenders who assess your company’s income based on the average over a certain period of time (usually three years).
I’m a Director, can I still get a good remortgage deal?
Your self-employed status won’t matter when it comes to remortgaging for a better deal; it’s simply a case of finding the right lender for you.
Will my dividends count against me in a mortgage application?
With mortgages and dividend income the tax liability is lower than standard earned income through a salary or taxed net profit, which in effect puts more cash in your pocket on a monthly basis. There are some lenders willing to lend more than usual, noting that the affordability will be greater. This is particularly important for those looking for the maximum company director mortgage loan they can get, as it can calculate the dividends in to show a higher affordability and get them a larger mortgage than they could obtain elsewhere.