Dividend Mortgage

How many years of dividend income do lenders usually consider for mortgage applications?

We touched on this before. The market average is the last two years, but some banks look over three. The bare minimum is one year.

It’s quite frustrating if you’re receiving dividend income or you’ve started a business because until you’ve gone through a tax cycle we’ve got no way of evidencing it to a bank. It needs to be on your tax returns or your accounts for us to include it.

Are there any mortgage products designed for borrowers with dividend-based income?

There may be, but I focus far more on the criteria. Lender A might take salary and net profits, while Lender B would take salary and dividends. So it’s really more about the criteria than the product.

There’s often a common misperception around mortgages, that if you have a slightly complex situation, people think you will have a more expensive mortgage. That’s absolutely not the case.

If we can line all that criteria up for you with a high street lender, you’ll get the same products they’re offering to everybody else. There’s no premium, no difference.

If we do end up in a more specialist area, like high value borrowing, or you’ve only got a year’s history, or it’s just difficult to prove, there are other providers we can go to. But I very rarely find that I need to go off the high street for a mortgage based on dividend income.

Can dividend income from multiple companies be included in a mortgage application?

Yes, as long as we can evidence it, typically with a tax return. The last couple of pages of that is your SA302, and that’s all the documentation we need. That clearly splits out whether your income is from a company, investments, property, etc. It’s a nice, clean document, and that’s what we’d use.

There are other ways to do it, which I’ll expand on. But yes, you absolutely can use multiple sources of income.

How do lenders calculate affordability if my dividends vary year to year?

Banks like to imagine a utopian world that isn’t real. They would love you to come to them with a three-year track record, where your dividends have stepped up 10% year on year. You’d get quite favourable treatment with that. They would take the average earnings or even the most recent year if they deem it sustainable.

If your income is on a downward curve, a bank will always use the most recent year, not the average. Fluctuations can make it tricky – from a bank’s point of view, you can easily understand why. But none of those things are a problem.

We just need to get into the numbers and do that assessment – but let me worry about that, not you.

Will using dividends for a mortgage affect the interest rates or terms offered?

I’ve accidentally covered that one already. There are specialist products which are useful if you don’t fit the high street, but just because your situation is a bit more complicated, it doesn’t mean you have to pay more.

Let’s say, for example, that Lender A will lend you the money at a market-leading rate. But you might want to borrow a bit more, which means using Lender B or C. On the high street, pricing is very competitive. You might only have to spend another £10 or £15 a month to get the outcome you want.

If it’s far more complex than that, we can have that conversation and explore the options, but often it’s just not a problem.

What documentation is typically required to prove dividend income for a mortgage application?

As ever, it depends. I’ll list the most common things we would use, but you don’t need them all. If you can just tick one of these boxes, there’ll be a lender for you.

We’d look at limited company accounts, your personal tax return, investment statements, bank statements, or an accountant’s reference.

We look at them all, because your accounts might show something different from your tax returns, for example. It’s better to explore multiple routes if we can, and then get you the right outcome with the right bank.

How do I apply for a mortgage using dividends, and how can a mortgage broker help?

The application is no different. As brokers, we want to get down to the nitty gritty – that’s what we’re always interested in. That’s why we need all those documents.

You want to know how much you can borrow and how much it’s going to cost, and your documents give us the answer. Aside from that, the main value that brokers give is owning the process for you.

If you’re running a business and you’ve got multiple streams of income, you’re a successful person. You’ve got better things to do with your time than trudge down to a bank to do this yourself. We save you a lot of time, and we do also get exclusive rates and preferential treatment from lenders.

Around 87% of all new mortgage business goes through mortgage brokers now, and it’s an upward trend. A lot of banks don’t want to get involved in the customer-facing side. They just want us to package the business for them. They love that, and they price accordingly.

Of course, you can do your own research online, and AI is great. I use it professionally, and if you do it for your own role, you’ll notice when it’s wrong. It’s great, but it doesn’t get you all the way. And it won’t tell you the relative merits of going for a fixed rate over a variable, or a repayment mortgage versus interest only. Product composition is probably the most important point, which we haven’t even touched on today.

It’s all well and good finding the right lender for the right loan amount, but how do you structure that loan? That’s the biggest value-add from brokers.

Key Takeaways:

• Dividend income can be used for a mortgage, but lenders typically require a track record of two or three years and usually take an average of the income drawn.
• The way dividends are assessed varies fundamentally between lenders; some high street banks don’t include them at all, while others may ‘gross up’ net dividends by adding back the tax, treating the income more favourably.
• When dividend income fluctuates, banks generally prefer to use the lowest or most recent year for their assessment if the income is on a downward curve, but may use the average or most recent year if the dividends have increased consistently.
• Company directors can often combine their salary and dividends in their application, and income from multiple sources or investment portfolios can be included, although investment income may sometimes only be partially factored in.
• Having a complicated income situation based on dividends does not automatically mean a more expensive mortgage, and the primary value-add of a mortgage broker is structuring the loan and managing the application process.
  
  

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