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Retained Profit Mortgage
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Retained Profit Mortgage
Richard Campo explains how using retained profits works when applying for a mortgage.
What is a retained profit mortgage and how does it work?
As a literal definition, it’s using retained profits to prove affordability for a mortgage.
To contextualise that, I think more people fall into this area than you might think. I had a quick look on gov.uk, and there are about 4.5 million limited company directors in the UK. That’s obviously a lot of people who have to think about this.
According to the Bank of England, there are 340 regulated mortgage lenders in the UK – again, more than you might think. Why on earth would you need so many? Well, it’s because banks assess income in lots of different ways. A lot of the main high street banks don’t include retained profits. There can be many reasons why you retain profit and not draw it – we’ll talk about that in more detail.
Most lenders instead look at salary and dividends or simply your net profit. But if we want to rely on older profits, there’s a useful line in your accounts called ‘Profit on Ordinary Activities Before Tax’ – it’s a mouthful, but that is a much fairer reflection of the profitability of a company, aside from looking at the balance sheet.
The point is, there are lots of different ways to do the same thing. Retained profit is a bit niche, but not too far off-piste. I just wanted to contextualise that – because as you know, once you’re self-employed, nothing is straightforward.
Am I eligible if I keep profits in my business instead of drawing them as income?
Yes, you can retain profits in a business and get a mortgage. There are tax connotations on that which I don’t advise on, but we do work in conjunction with a lot of accountants in this area.
You are eligible, in that we can look at a mortgage if you’re retaining profits. Off the back of Covid, the businesses that did well are those that had reserves to fall back on and have done things quite prudently. But if you’re prudent in how you run your business, you could feel disadvantaged in getting a mortgage – because you haven’t drawn the income.
We can do it, and we can evidence it, but it’s not as clear as simply drawing the income out.
How do lenders assess retained profits when calculating affordability?
A simple answer – it’s all in the accounts. We’ll either get a copy of the accounts or write to your accountant. It’s listed under shareholders’ equity or capital reserves. Lenders do look at business balance sheets, and if you’ve got a very positive balance sheet, that’s great.
It goes in your favour for a mortgage. If someone hasn’t run their business so well, and there are debts or negatives on the balance sheet, an application could get declined. You’re never going to be in that area if you’re retaining profits – which is really positive.
Do I need an accountant’s certificate to prove retained profits?
No, you don’t because it’s all within the accounts. However, banks only look back over two or three years. If we need to look back over a longer period, it might be more complex. Perhaps there’s a group holding or it’s just easier to go through an accountant.
An accountant’s certificate is often helpful where things don’t quite fit the usual boxes and we need a narrative around it. Accountants do vary – many of our clients’ accountants are wonderful, but some less so. We’re certainly engaged with accountants – it all comes back to what you want to achieve and how we get there.
We might not even need to get into that. There are lots of ways of doing the same thing. If you’re drawing a salary and dividends, that might just be sufficient for the loan you need.
Will all lenders accept retained profits for mortgages?
No. Most banks don’t accept retained profits. It depends on how it’s all captured in the accounts. It is probably more relevant for higher earners, too.
As we speak today in October 2025, if your income goes over £99,000, you start losing half your earnings in tax. A lot of people try hard not to do that – and if you have the ability not to draw the income, why would you? We understand that, and so do the banks.
The high net worth exemption may apply – if your income is over £300,000 a year, or your net assets are over £3million, none of the rules I’ve talked about apply and banks simply use common sense.
Retained profits is a great way of saying that your income is actually considerably higher, and you just don’t draw it. It can trigger those high net worth options with more bespoke lenders.
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Can retained profits be used alongside salary and dividends for affordability?
As a rule, no, because if you take your salary and dividends plus the profit, you’re double-counting that income.
Where it starts to get complicated is where someone’s had very good profits in previous years, and then drawn it out in later years. Their dividends may have exceeded the net profit in that tax year, for example. In that situation, a bank’s going to ask questions about whether the income is sustainable.
The net profit is always relevant because it’s a reference point, and banks always look at sustainability of income. There might be a good story to tell – you’ve had big capital outlays or changed the structure of the business, or bought premises. We just need to understand that story.
We can’t just look at numbers in and numbers out – there needs to be a narrative there. Otherwise you could potentially come unstuck over something that’s perfectly explainable.
How many years of business accounts do I need?
Typically in the market it’s two years. The bare minimum is one year. That’s always the issue with self-employed people – it’s always backward-looking.
With employed people, we look forward because you live paycheck to paycheck, whereas for self-employed people, your records could be 18 months behind where you actually are.
One caveat applies if there’s a contractual arrangement within your business, where you’re paid a day rate or a set fee for work, or working on a fixed-term contract. It’s worth looking at our contractor mortgage page because there’s a slightly different assessment here that’s sometimes more favourable.
Do lenders look at net profit, gross profit or both?
They look at both, but the net profit is used for the assessment. If your net profit was higher than your gross profit, there’d be a lot of questions to ask – but there are reasons why that could happen, such as previous losses carrying forward or capital out.
I’m not an accountant, so I don’t know the full extent, but 99 times out of 100, gross profit will be higher than net. Obviously you need to take the tax off, and that’s broadly what the net profit represents, and banks look primarily at that net profit.
How does using retained profits affect the Loan to Value (LTV) I can borrow?
It doesn’t really matter. This is one of those big misperceptions people have around mortgages. Certainly once you’re self-employed, you assume it’s all more complicated – that you will be charged more or need a bigger deposit. But in reality, it’s no different at all.
Lenders have different criteria for various reasons. Banks don’t take risks in every single area. Some are better with the self-employed and may prefer specific sectors. As a lazy example, during Covid banks didn’t like people in hospitality.
Essentially, banks take different risk-based views. As long as you meet their criteria, you get the same products and Loan to Values as anyone else. You could have a 95% – even 100% – mortgage if you wanted to. The criteria sits behind it, but that doesn’t drive the price as such.
Just to be very clear, certain banks do want a larger deposit when you’re self-employed. They might want 25% or more. But lenders that are good in this area don’t put specific requirements in place.
Are the interest rates or fees higher for retained profit mortgages than with standard self-employed mortgages?
No, and that’s a big positive. Typically, there is no difference. It’s just the criteria that drives it.
A point worth stressing is that higher earners win in this area. I mentioned the high net worth exemption already, and if your income is over £100,000, banks become more flexible. Even a couple of major high street banks apply a different metric if you’re borrowing more than £1 million based on retained profits.
Limited company directors tend to be wealthier in this country. The current labour government is trying to change that, but banks are in tune with it. Mortgages aren’t more expensive or more complicated – it’s just down to the criteria, but it does favour higher earners.
What else do we need to know about retained profit mortgages?
Just that the way we approach it is different. You’re my client, I work for you, and my job is to find you the ‘best’ mortgage I can. And ‘best’ means different things to different people.
For some people it will be the largest loan, and for others it will be a level of flexibility.
As a broker, we get exclusive rates and preferential treatment from lenders – some that don’t even deal with the public. There’s always an advantage with us, including direct access to underwriters. As I mentioned, there can be certain tipping points where we can talk to underwriters based on relationships we’ve had over many years.
You might go to the local branch of your day-to-day bank, but if they’re one that doesn’t accept retained profits, you’ve wasted a lot of time and effort.
Running your own business takes over your entire life. So let us do the old donkey work, while you focus on what you’re good at, and hopefully we’ll make your life as easy as possible.
Key Takeaways:
- A Retained Profit Mortgage uses a company’s retained profits to prove affordability for a mortgage, making limited company directors who keep profits in their business eligible.
- Most high street banks do not accept retained profits as income, which means working with a broker or bespoke lender is often necessary.
- Affordability is assessed by lenders primarily through the business accounts, looking at shareholders’ equity or capital reserves, and typically requires two years of accounts (one year minimum).
- You generally cannot use retained profits alongside salary and dividends for affordability calculations, as this constitutes double-counting of income. Net profit is the key metric used for assessment.
- Using retained profits does not result in higher interest rates, fees, or a lower Loan to Value (LTV) compared to standard self-employed mortgages, but the criteria tend to favour higher earners.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
For specialist tax advice, please refer to an accountant or tax specialist.