Company Director Mortgages
Limited Company Director mortgages
Limited Company Directors can raise mortgages based on their PAYE or Dividend Income, and also on Retained Profit. Specialist mortgage brokers can assist where trading history is minimal, profit has fluctuated, or the trading situation is particularly complex.
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.
For more on mortgages for limited company directors read on …
Limited company director mortgages
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.
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.
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.
If a limited company makes a level of profit which is not taken out as dividends by the shareholders, this is known as retained profit (as it is retained within the business).
Mortgage Lenders can be particularly cagey about using retained profit to support a mortgage application from a company director. The view is that the retained 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 Retained Profit
A handful of mortgage lenders will consider PAYE, dividends, and retained profit from a company director when underwriting a mortgage – however, each lender’s approach to this differs.
The majority consider retained 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 retained profit before tax which is clearly the most flexible and useful approach.
Proving your income
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 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 retained profit in it’s 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 do not have three years trading record, many mortgage lenders will not consider you.
Remember, if you have less than three years trading in your business we have our exclusive Self-Employed Mortgage available.
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
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 hinderance than a help to a mortgage application.
Most lenders will take a two or three year average when calculating assessible income and this is not always helpful to the applicant.
Deposits from company funds
If your deposit money is coming from retained profit held in the form of cash within the business, be aware that this can be an issue for lenders. Lenders do not like to see large sums of cash leaving the business just as they are being asked to make a lending decision based on the continued trading success of that business.
We have even seen this remain an issue for lenders after the accountant has confirmed that the loss of the funds will not affect the ability of the business to trade effectively.
A smarter approach is to move the cash out of the business and into your personal account a few months before you apply for your mortgage.
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.
If you are asked for your income by your mortgage broker, you need to quote your PAYE and dividend income. Make your mortgage broker aware of the make-up of your income from the business, particularly where retained profit is a factor.
Make sure your accountant is ready to assist in your mortgage application by responding promptly to requests for information. Have copies of three years accounts ready (if available) signed by both the directors of the business and your accountants.
Obtain your last three years SA302s from HMRC so that they are available to the lender.
Where possible, avoid using retained profit as your source of deposit.