Limited Company Directors
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Limited Company Director Mortgages
Richard Campo explains the mortgage process for limited company directors.
Are there mortgages tailored to limited company directors?
The short answer to that question is yes, there are mortgages tailored to you. All high street banks have criteria around limited company directors, and the assessment differs quite wildly which makes it more complicated.
Often people think they need to go to specialist providers, but that’s not necessary. We might end up there, and that’s absolutely fine, but very commonly a company director will find a mortgage with a high street lender even if they have a complex situation.
Where banks’ assessments get into a lot of detail is if you own over 25% of the shares in the business. With over 25% of the shares, company performance is relevant – so banks will want to see your accounts, profit and loss etc.
Once you own a quarter of a business, you’re a person of influence, so your performance dictates how the company does. If you own less than 25% you will simply be treated as an employee. We just take your salary and any dividends and assessment is really easy.
How do I prove my income and document my trading history?
The six main high street lenders do around 85% of all residential mortgage lending. But each of those six banks has a completely different policy around company directors. So that affects what they look at and the documentation we need to provide for the mortgage.
Some banks will work on the net profit of a business. Some will take your salary and the net profit, some will take your salary and dividends and a few banks even look at something called ‘profit on ordinary activities before tax’ which we’ll talk about later.
How much you need to borrow is always the driving factor, and will dictate our path – because some of those figures work better than others.
For example, if a bank looks at salary and dividends – probably the most common way of looking at limited company directors – it’s quite simple. You add your salary and dividends together and that’s your income. This can work well as your dividends are taken as gross to allow for different rates of tax. Banks convert your dividends to what PAYE would be – which is basically a 20% uplift so you can borrow more.
If you don’t pull out all the income from your business, some banks look at that. If you’ve run your business really well over the last two or three years, particularly through such a difficult period, you may not have drawn the income. Some banks will penalise you for that, while others don’t.
Some banks look at a combination of salary dividends and net profit, and quite a few now ask for an accountant certificate. That’s a really good way of doing things because banks certainly aren’t accountants, and in the last few years you may have taken bounceback loans or grants to get through Covid. That makes it difficult to ascertain the profitability of a business. An accountant certificate can give you a really good overview of your trading without getting lots of documents together.
What if I have a fluctuating income?
So fluctuating income is standard when you’re self-employed. Banks tend to look at your annual performance so any fluctuations within the year are not so relevant. You may also find that income fluctuates year to year which is not uncommon.
A company needs to be trading for at least one year for you to get a mortgage. A few banks will look at either one year’s trading history or just your last year’s figures. The majority look at your last two years’ figures and take an average to ascertain what you can borrow.
If your most recent year is lower than the average, banks will just take that year. If your most recent year is much higher, some banks will just work on that year’s figures.
What about Pay As You Earn income?
As a limited company director you get to choose your salary, and I see massive variance in how people do that. What some people do, like myself for example, is pay themselves a salary that covers their life – typically somewhere between £50,000 to £100,000. Most commonly most people pay themselves at a minimal level in terms of tax – around £9,000 a year. Then you take the rest out as a dividend.
So whatever your PAYE income is, you can include it just as a standard employee would.
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What about retained profit?
If you’re looking at a business objectively, the key thing is a line in the accounts that says ‘profit on ordinary activities before tax.’ Most people, including business owners, don’t even look at it, or see it as net profit.
The profit on ordinary activities before tax is actually the true profitability of your business. Some banks will ignore salary, dividends, net profit etc and just look at that line in your accounts. It’s really important if you’re retaining the profit. A bank will look at and see that your business made £1m profit, you paid yourself £250,000 – that’s fine, they will still include the £1m pounds as your income, because you didn’t need the additional £750,000 or want to pay tax on it.
Those banks are in the minority, but they are still high street banks. Most banks won’t include income that you don’t draw out of the business. It’s a bit of a Catch-22 – a little like how people who don’t use credit cards or loans can have a poor credit score. We can make sure you get the right outcome if you’re in this situation.
How much can I borrow as a limited company director, and what deposit will I need?
There’s a common misconception that when you run a company you need a larger deposit. You don’t. Some banks do apply that rule, but not all of them. Theoretically, subject to the lender’s usual criteria, you can buy a property with a 5% deposit. Every 5% more deposit you can put down on top of that increases your choice of lenders and reduces rates, because you’re lower risk to a bank. Once you hit the point of a 40% deposit you get the lowest rates available.
How much you can borrow is linked to that. So if you’re a higher earner, with an income of £75,000+, most banks now will offer you around five and a half times your income. You do need a 15% plus deposit to get into that bracket.
If your deposit is less than 15% or if your income is lower than £75,000 you might get four and a half times your income.
How can a broker help with a limited company mortgage?
This is a complex area with many different forms of assessment. So we will ask you for your last two years’ figures and use our affordability tools to look at the options. We balance off how much you want to borrow with the most suitable bank.
It’s even more important now we’re coming out of Covid, and banks are looking back two or even three years. If the company made a loss, a lot of banks will decline you for a mortgage – some banks can decline the application if you took government assistance. Those lenders are fewer than they used to be, but it is a very real risk.
Making a loss or accessing government assistance is not a show stopper. We know how to navigate that.
Plus, with the property market being so hot at the moment, we advise that you talk to a broker as soon as possible. Although it doesn’t take us long to find you the right deal, the way things are assessed can have wildly different outcomes as to what you can borrow.
So it’s best you know that before you find a property. Plus, If you’re looking to refinance, do it as soon as you can, because rates are going up. The quicker we can figure out your options, the more money you save. Let us do the work for you and make your life a lot easier.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical fee is £495.