When you come to get a mortgage and you are a company director, you may not realise that different rules apply to mortgages for Limited Company Directors.
So here, we outline what the challenges are, what up/down sides, and what to look out for in a lender. Also, and just for clarity, this is if you are looking to buy a property for you to live in. If you want to buy a property via a company as an investment, this blog will be of much more use for you.
Why are mortgages different for Limited Company Directors?
The main difference with mortgages for Limited Company Directors will be if you hold equity/shares in the company you work for, and if so, how much.
The general dividing line is that if you hold less than 25% of the shares of the company you work for (or none at all), you will be treated as a ‘normal’ employee. So lenders will use your salary, any bonus and any dividends to assess what you can borrow. So not that complicated.
However, if you own 25% or more of the shares in the business, most mortgage lenders will treat you as being self employed (for more detailed info on this you can see the relevant page of our website here), so most lenders will want to look at the company accounts and/or want a reference from your accountant/Finance Director.
We do often get asked “but I am employed by my company so why should this differ?”. If you own the majority, or all of the shares in the business, yes, you may well be an employee from a tax perspective, but mortgage lenders take a different view. As a person with so much influence on the company, they deem the company performance as equally valid as your income, as this often is the key indicator as to the sustainability of your income.
What are the downsides of this approach?
As long as the company has performed well, there is no real downside other than the greater intrusion into your affairs. However, in a post Covid economy if the company has taken any Government backed support such as Bounce Back Loans, or CBILS loans, that will need to explained why, and the ongoing/future cost of these loans factored into the company profits before a mortgage lender will be happy to grant a loan, but it is by no means a show stopper.
This is where an experienced broker for Mortgages for Limited Company Directors is very valuable as they know the right lenders to approach who understand this, and also how to present the case correctly. Very few banks decline a loan on this basis, but they do have some quite complex rules which can create a Catch 22 if the information is not presented correctly.
However, with correct presentation, documentation and explanation, the vast majority of High Street lenders should be happy. The greatest issue will be if the company has suffered a loss in the last 2 years. Again, in a post Covid world that will be more common and a mortgage lender will really need a lot of comfort as to why it was a one off and that things are sustainable going forward. In all honestly, the majority of lenders will decline an application if the company has made a loss in its most recent trading year, but some banks are trying to be more pragmatic. If the company has made a profit in its most recent year, but had a loss the year prior, that is less of an issue. It may not be for a High Street lender, but there are smaller, more specialist firms that can take a more open minded view.
The sector you work in is also a large factor at present. For example, if you are a company director for a sports hospitality company that has previously made large profits, lenders may still be very cautious when looking to grant a mortgage as they will have to consider the viability of that income in the future. Again, not a show stopper, as in this example – if overheads have been cut back and the business model adapted to more online events – there is a good argument to do the loan. If the company is in a holding pattern pending the opening up of the economy again, that may be harder work.
What are the upsides?
As a company director, typically you will get paid more, and have a more complex income. For example, if you receive dividends from the company, some lenders ‘gross up’ the income you receive. Which means they add the tax back that you pay into their calculations which often offers you a much greater loan than an employee who is paid the same amount purely via PAYE.
If you are a higher earner, typically £300k + per annum, Private Banks may be very keen to assist you. In this example, if you earn over £300k, you are deemed a High Net Worth individual by the FCA and therefore different affordability rules apply, meaning mortgage lenders can be much more flexible in how they grant you a mortgage. They may be open to accepting a lower deposit than would typically be the case or stretching the loan amount further. If you do own a large stake in a company and are considering exiting at some stage via sale/buyout/floatation, that is exactly why Private Banks are keen to work with you, as you may realise a large ‘liquidity event’ in the future (that means being paid a large sum of money for your stake in the business to the lay person) which you may then need assistance on with reinvesting or future plans which is their forte.
What types of income are acceptable?
As touched on above, lenders will look at:
- Your basic salary
- Any bonus/commission
- Any dividends received
- Drawings/profit share if you work in an LLP
Most of this information can be captured in your tax return. The magic document in the mortgage world is your ‘SA302’ which is the confirmation of your tax statement from HMRC. You’ll see your income broken down very neatly and what tax has been paid etc., that is why mortgage lenders love this document as it makes their life easy. HMRC do not send this out as standard anymore but it can be requested and generally received within about 48 hours (your accountant can normally obtain this very easily for you). If that is not available, company accounts or an accountant’s reference many be easier to use. This is when you get down to the nitty gritty of what lender to use as you need to balance off:
- How much of a loan do you need
- What type of income verification is available
- What timeframes do you need to move in (as some lenders are painfully slow in this area)
- How does the lender treat the income that has been presented.
Once a good broker has clear sight on the above, they can then plot the course forward which should be quite plain sailing. However, if this information isn’t obtained, or a search of Companies House shows you do own 25% + of a company when you didn’t feel it was important to disclose that, you may have to go to back to the start and do not collect £100. If you have selected the wrong lender at that stage, that is when things get sticky or a change of course is needed.
Why use a mortgage broker for Company Director mortgages
As this is a more complex area, that is why a good mortgage broker insists on the type of information above BEFORE ever going to a lender. As if you get an application declined, not only does that waste your valuable time, it can adversely effect your credit score by adding credit searches when they are not needed (for clarity, there is no way a bank knows you got declined for a mortgage elsewhere, but lots of credit searches in a short space of time is a good indication that is happening). With lenders working more and more proactively with mortgage brokers and opening up their credit policy, affordability tools, access to underwriters and dedicated contacts within the bank. If the correct prep work is done, there is no reason why you can’t make easy work of what can be a complex and difficult area.
If you fall into this category, or would like to speak to any of our team on any mortgage goal that you have, we would be delighted to help. You can find the contact details of the team here.