Mortgages for Limited Company Directors

Tuesday October 1, 2019

Contrary to popular opinion, mortgages for limited company directors are readily available if you know where to look! A guest blog from our partners Prospect Tree.

Many self-employed borrowers often struggle to find mortgages – Why?

A Lenders income requirements policy varies hugely across the marketplace and can be extremely complex, often leading to applicants being declined by banks and building societies on the high street. By speaking to a mortgage broker who has an in-depth knowledge of lender criteria you will benefit from a professional who can steer you through the process and find the right lender for you.

Company director mortgage requirements vary the most lender-to-lender. Perhaps your company doesn’t have a long history of trading, you're not sure what can count as income or maybe you retained some profit in your company for tax efficiency or investment purposes and need a lender that will consider your share of the retained profits as income. All of these scenarios are normal within this section of the market and impact lots of borrowers.

Income

The most common recommendation from an accountant is that you take a salary up to the tax-free threshold, and then dividends for any other income you take. It is also common for Directors to leave cash in their business, to avoid paying unnecessary income tax or to utilise these funds for business growth.

The issue many company Directors find however is that most lenders consider ‘income’ as being the actual drawings you have taken. For example, if your company has made a £200,000 profit and you have paid yourself a combined £40,000 of salary and dividends the lenders will consider your ‘income’ to be £40,000. Without specialist knowledge of the self-employed/ company Directors criteria, applications can fall down at this point. Most high street lenders operate like this.

Borrowing using retained profits within a limited company

Thankfully there are specialist lenders who can consider mortgages for company directors based on the company profit even if you have retained some income in the business.

The impact this has on maximum loan amounts available can be massive, as per the illustration below:

 

Lender type

Income type considered

Amount of declarable income (for example purposes)

Max mortgage you could get (based on x5 salary)

High street

Salary + Dividend

£40,000

£200,000

Self-employed specialist

Share of net profit

£200,000

£1,000,000

 

This type of criteria is not only pertinent to large companies with very high annual profit but also to the small company Directors looking for mortgages.

Particularly in the early days of a limited company, many business owners look to reinvest profits directly back into the business in order to help it grow. Without this knowledge Directors could end up compromising their decision when other options are potentially available.

Can I get a mortgage if I changed my trading style recently?

It is a common occurrence for many sole traders to go Ltd when they start earning more money. If you do not have a full year trading within the new Ltd company finding a mortgage by yourself can seem an impossible task.

The vast majority of lenders consider this a new business and will, therefore, require the standard 1-3 years minimum trading time and accounts from the new Ltd company in order to establish your income and borrowing amount available to you. This is the case even if you have been running the same business for years as a sole trader.

The good news is that not all lenders have the same criteria and there are a select few who will consider the previous business as evidence of income. A good mortgage advisor will understand your situation and needs and should be able to clearly communicate this to the lender.

Remortgaging to raise capital for business and other purposes

If you want to raise capital from the equity in your property for your business the likelihood is your application would be declined. The majority of lenders only allow capital raising for home improvements, debt consolidation or a couple of other specific purposes.

If you want to release money from your residential property, there are only a hand full of lenders who will even consider the application. Usually, 85% loan to value would be the maximum available. And so in this scenario it is advisable to use a local mortgage broker who understands your needs and can work with local estate agents, who know the value of property in the area.`

Prospect Tree Mortgages are mortgage brokers in Kent but offer services nationwide. They have a lot of experience dealing with complex situations, specifically company directors, and this experience enables them to quickly work through lender criteria and find the right lender for your specific circumstances.

Borrowing using your business's most recent years' figures

The normal method of working out income for a company director would be averaging the last 2 or 3 years income. When looking to maximise the loan amount available a company director with a growing business may want to take advantage of the most recent years' figures rather than the lower figure that would be used if an average was taken.

The example below outlines the difference in the amount of loan available based on these criteria.

 

Year

2017

2018

Income used if averaged

Income used if recent year

Income

£18,000

£60,000

£39,000

£60,000

 

Based on the above example, the maximum loan size at 5 times income would be £195,000 and £300,000 if based on the latest years’ income.

Thankfully there are specialists who will consider mortgages for ltd company directors based on the most recent years’ income.

Can I get a mortgage if my business has declared losses in the last three years?

If your company has declared a loss in the last couple of years getting a mortgage can be incredibly difficult. High street lenders will view this as increased risk due to lack of income reliability.

If you have declared a loss in the most recent year it is highly unlikely you will have a successful mortgage application, unless your salary was deducted prior. In this case, you may still get approved subject to underwriter approval with a valid reason.

The lenders who would be prepared to consider the application increase as time elapses since the declared loss.

At Prospect Tree Mortgages we have a thorough knowledge of company director and self-employed mortgage criteria, this is imperative in obtaining the right mortgage for company directors.

If you have any questions on any other aspects of mortgages get in touch with us via our website www.ptmortgagesltd.co.uk or on social media. If you would like to talk with an advisor call our office directly on 0800 8620 840.

 

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