Mortgages for Company Directors: How to Use Company Profit to Get the Size of Loan You Need
If you're looking at what mortgages are available for company directors, it's likely that you may need a mortgage lender to include your company's profits towards your affordability calculations.
A large portion of high street lenders won't accept your company profits as proof of income - but there are specialist lenders that will. You just need to speak to a specialist mortgage broker who knows where to look and can connect you to the right lenders.
And while you're here, see our full guide for High Net Worth Mortgages.
How Do Mortgages for Company Directors Work?
As a company director, you may take a big chunk of your income as dividends for the better tax rate, only taking a small annual salary (often just the personal allowance each tax year).
And you may have significant cash left in your company's accounts as retained profits that should reflect your earning power, but that you don't want to take as income for tax reasons.
And yet most lenders won't even look at those company profits for your mortgage application.
In fact, most mainstream lenders shy away from complex mortgage applications altogether, because they don't have the specialists in place to handle them - instead, they're geared for simple, cookie-cutter mortgage applications in bulk, because that's the most efficient way for them to earn money.
The Good News
Retained company profit can help you borrow more. But only if you go about it the right way. And know which lenders to approach. This is where good mortgage advice is essential.
The Bad News
You could lose out if you don't approach your application correctly.
Our clients were a husband and wife who ran a successful small company working in recruitment.
The husband is a director, and the wife earns a salary from the company.
They had just had one of their best years in the business. The seven-day working weeks of setting up a small business were paying off. It seemed reasonable to go house-hunting for the family home they’d always dreamed of.
They found five bedrooms in Surbiton, Surrey, where they live, for £1.2M.
But when they went to their bank, they were turned down for the mortgage they needed of just over 50% of the value – on the grounds of affordability.
They were prudent business owners, and following their accountant’s advice, they'd paid themselves modest salaries that kept them below the tax threshold.
The husband took a dividend of around 25% of the company’s net profits. The remaining 75% of the profit was left in the company’s accounts.
The bank’s decision seemed like madness to them: as sole owners of the company, they could afford the size of mortgage they were looking for.
They were advised they’d have to wait to reapply until the following year when they could pay out the profit as a dividend that could be counted towards their income (but they would then need to pay dividend tax on it). More details »
Here’s what’s happening with the calculations:
They’re each taking a salary of just under £10,000
The husband's dividend was £30,000
The net profit left in the company was £112,000
Most high street lenders will consider drawn income only = £50,000 a year x5 (the most favourable affordability ratio) = max £250,000 in borrowing.
What’s The Solution?
Was their accountant wrong to advise them to leave profits in the company?
In terms of tax efficiency, no.
If you're like our clients, you may have been advised to take the optimal director’s salary of less than a certain amount per year from your company.
- Salaries are a tax-deductible expense: the company saves corporation tax at 19% on gross salary costs.
- You take a director’s dividend from the company for the remainder of your living expenses. National Insurance doesn’t have to be paid on dividends.
- Dividend tax payable on your dividend starts at 8.75% - up to 39.35% for dividend earnings over £150K.
- The remainder of the company’s net earnings is left as "retained profit". You don’t pay dividend tax on dividends that aren’t paid out.
You May Need a Specialist Lender
All well and good for tax minimisation.
But now you want to apply for a mortgage – or a bigger mortgage.
- As our clients discovered, drawn income in the form of salary plus dividend isn’t going to get you the size of mortgage borrowing you may want.
- If you’re like them and you own a company showing good profitability, but you choose to leave profit in the company rather than draw it down, you need a lender who takes a broader view of the ownership of limited company income.
- But you won’t find them on the high street.
The conventional view of mortgage affordability is that it should be based only on an individual’s actual earned and taxable income.
These banks and building societies will consider that income that has not been drawn down from a company, even if solely owned, belongs to the company rather than the individual.
Access the Borrowing Power of Retained Profit
Fortunately, high-street lenders are no longer the only sources of mortgage finance.
- Specialist lenders such as private funds, mutual funds and smaller challenger banks take a more flexible, "bespoke" approach to their lending decisions.
- Parts of their mortgage application process are automated, but their decision-making is supplemented by real-time reviews by an underwriter who can take a common-sense approach.
In this case, we took our client's application to a lender who we knew would take into account this year’s net profit retained in the company and add it to the profitability calculation.
(Other specialist lenders might have wanted to see the company’s profitability over the past two or three years before making their decision.)
The result: net profit in the company plus salaries:
£112,000 + £10,000 + £10,000 = £132,000 x 5 = just short of £660,000 in borrowing.
How is a Company Director's Mortgage Calculated?
The amount you can borrow as a company director depends on several factors, including your income, creditworthiness, deposit, and the lender's specific criteria.
High street lenders tend to have stricter eligibility criteria, and there's a higher chance that they will reject a self-employed mortgage application.
A company director's income can include a combination of salary, dividends, and other benefits. But not all lenders will look at retained company profits - that's where you'll need to speak to a specialist mortgage broker like Clifton Private Finance.
Lenders will also assess the stability and reliability of this income when determining the maximum loan amount. And as per any mortgage, generally, the higher your income, the more you can borrow.
Lenders will also calculate your debt-to-income ratio to assess your ability to manage mortgage payments. Your debt-to-income ratio includes all your monthly debt obligations, such as existing loans, credit card payments, and the proposed monthly mortgage payments.
In many cases, you will need to work with a specialist lender, as they will be more accustomed to processing mortgage applications for company directors and can offer you mortgage products that may be more suitable for your circumstances.
An experienced mortgage broker will have contacts with lenders who have the facilities to take a holistic view of your finances and may be able to offer a more flexible service.
Do Dividends Count As Income for a Mortgage?
In the UK, most lenders accept dividends in their calculations, but they will typically only include one source of income in a single borrower's application.
If most but not all,= of your earnings come from dividends, then you may struggle to achieve the borrowing amount you need using one income source.
Dividends often fluctuate in line with a business's performance. This could narrow down your lending pool because a lot of high-street lenders want to see consistent earnings.
In this case, you may have more success applying for a mortgage with a specialist lender that has experience dealing with complex income mortgages.
Some specialist lenders on the market are familiar with processing applications from company directors and can accept multiple income sources. This may offer you better chances of securing the loan amount you are looking for.
How Much Deposit Do I Need for a Limited Company Mortgage?
For a standard residential mortgage, directors of limited companies typically need a deposit of at least 10% to 25% of the property's purchase price.
But this can vary depending on several factors, including the lender's policies, the type of mortgage you're applying for, and your financial circumstances.
Different lenders have varying policies, and some may be more flexible than others when it comes to deposit requirements for company directors. It's advisable to shop around and compare offers from multiple lenders to find one that suits your needs and financial situation.
A specialist mortgage broker can use their industry expertise and network of lenders to guide you through your options and present your application in the best possible light to the lender.
Does Being a Company Director Count as Self-Employed?
Mortgage lenders typically class limited company directors as self-employed. The main reason for this is that your income structure is likely to be different from that of a company employee.
While company directors are often classed as employees for tax purposes, your income is likely to be more complex, necessitating additional paperwork in your application. For this reason, it makes sense to class it as a different mortgage type.
Lenders may need to review your tax returns, company accounts, and other financial documentation to understand your financial situation fully.
However, many lenders do specialise in providing mortgages to self-employed individuals, including those who are directors of limited companies. These lenders may have more flexible criteria and a better understanding of the complexities associated with self-employed income.
Is it Hard to Get a Company Director Mortgage?
Getting a mortgage as a company director is not necessarily harder than obtaining a traditional mortgage type, but it can present some unique challenges and considerations.
Lenders typically require proof of income to assess your ability to repay the mortgage. Company directors often have income structures that involve both salary and dividends.
Providing clear and organized financial records - including tax returns and company accounts - is an essential part of demonstrating your income.
While obtaining a mortgage as a company director may have some unique considerations, it's not inherently difficult if you are financially stable, have a good credit history, and can provide the necessary documentation.
How We Can Help
High street banks are accessible – as the name implies – to walk-up customers making a direct approach. But even if they’ve been your bank for years, that doesn’t mean they’ll produce the mortgage offer you need.
On the other hand, the wide range of specialist lenders are mostly accessible only via an intermediary broker.
- Small challenger lenders don’t have the capacity to direct prospective borrowers towards their most appropriate lending product.
- And they don’t have the customer support staff to guide borrowers through the details of the application process.
- In addition, their rates and lending criteria aren’t widely advertised, making it impossible for an individual to compare rates and terms across the market.
- So if you get direct access to a specialist lender and you manage to get an offer of terms, you’re in danger of researching terms from only one or two lenders.
The job of a specialist mortgage advisor such as Clifton Private Finance is to know about the full range of lending options available right across the market.
One of our specialist brokers will be able to identify the lenders who will be willing to consider your particular circumstances (dividend income and retained company profit). And they can package your application to suit their criteria.
Please call our team on 0203 900 4322 or book a callback into our diary at a time that suits you.