Can Company Directors Get Mortgages?
For a lender to consider a company director for a mortgage, more financial information is required than it would be for a company’s employee. This is due to salary fluctuations and is where a lot of company directors need some help and sound advice!
Getting a Mortgage with a Limited Company
As with most limited company directors, you will have likely been advised by your accountant to minimise the salary you take from the company’s net profit, in order to stay within a lower tax threshold and keep tax efficiency optimal. With the rest of your income being in the form of dividends.
This is all fine when trying to reduce the amount of tax you need to pay on your income, but it can greatly inhibit the possibilities of you being accepted for a mortgage or the amount available for you to borrow.
For similar reasons, you may also have trouble getting a mortgage if you have not been trading for a long period. Additionally, for any reason, you may not have several years worth of accounts to produce for the lender.
Generally, it’s more specialised lenders that tend to have more lenient requirements when considering your specific circumstances, as high street lenders are less inclined to take higher risks.
On the other hand, however, due to regulations on the financial industry being loosened in recent years, we are seeing an increase in the number of high street banks and lenders leaning towards this type of lending.
What Affects the Approval of a Mortgage for Company Directors?
As mentioned by Mortgageable, the amount of information that would be required can vary between lender to lender, but that is not all that can vary.
In fact, variations in the loan can be highly dependent on your circumstances, from the amount you are allowed to borrow, the term of the loan, the interest and the monthly repayment amounts.
Financial Information and Trading History
One major piece of information that a lender will want to see is proof of income over a certain timeframe. The exact numbers of financial accounts required can vary from lender to lender.
Typically they will want a financial report that covers at least one tax year, but it is not uncommon for lenders to require between 2 or 3 years worth. What’s important to the lender is that you are demonstrating what you have earned so that they can get a clear indication of your ability to repay.
It’s also important to consider the type of business you have and this can change how you receive income and so you may need to provide the information they are looking for in different ways.
- Sole Traders – It’s highly likely that you’ll be asked to provide your income and due tax with a tax self-assessment. You can do this through an SA302 form which can be obtained, filled in and sent to the HMRC in return for a proof of income and tax.
- Partnerships – If you are a member of the partnership, you will need to provide your share of the income. The amount of mortgage available, as well as the other terms of the mortgage, can only be based on your share.
- Limited Company – A lender will typically require tax self-assessments or an SA302. Remember to not only take into account the salary you receive but also dividends that can fluctuate depending on company profit.
It’s worth noting that if you receive PAYE income, for mortgage purposes your lender may consider your gross income.
Additionally, lenders are usually reluctant to lend to those using retained profit to substantiate the mortgage application. The reason being is the retained profit is not declared officially as an income in the form of dividends and so it is not a reliable indicator of your ability to make repayments.
How Much Can a Company Director Borrow?
The maximum amount you can borrow is mostly determined on your verifiable income but lenders can also consider your outgoings to give them a clearer picture of your ability to repay over time.
The total borrowed amount will be calculated using a multiplier of that verifiable income, generally, between 2 and 5 times but, this can vary depending on your income fluctuations and other specific circumstances.
As an example of this, let us suppose your share of the company profits could be £150,000 but you only take £50,000 in salary and dividends combined. Let’s also suppose the lender in question uses a multiplier of 3.
In this instance, the maximum loan you could borrow is £150,000. This is where taking an income for better tax efficiency can be problematic for you and the amount you wish to borrow.
What Deposit Should I Expect?
The deposit you will require is another factor of the loan that can also vary considerably depending on your circumstances and trading history.
Verifiable history of dependable income for at least 2 years would make it much more likely to have a required deposit closer to the 5% mark than a trading history of two years with a highly fluctuated income.
If you don’t have enough trading history or are looking for a mortgage with bad credit, then you will more than likely see a higher minimum deposit. Sometimes reaching 20-25%.
Having said that, when determining the deposit of a mortgage, a company director would not experience anything different to anyone else.
You can also choose to come in with more deposit than that is required. This will give you access to better mortgage deals and also can decrease the interest and monthly repayments.
Finding Mortgages for Company Directors
In many ways, a company director is in a difficult situation when finding a mortgage, mainly due to the income fluctuation that can come with taking dividends as a constituent of your income combined with taking a salary at a lower threshold.
Looking through all of the deals available and being rejected by high street brokers takes up valuable time and it causes unwarranted stress!
We can help with your search, as Mortgageable is dedicated to finding the best deals for our customers based on their circumstances, including those looking for a suitable mortgage for a company director.
Get in touch, and we will guide and advise you further on your path to securing a mortgage while bringing the perfect lenders right to you. We are committed to taking the work out of your hands and the stress out of finding a mortgage that can work for you.