Limited Company Director Mortgage
Limited Company Director Mortgage
Paul Holland explains mortgages for limited company directors
Are there mortgages tailored to limited company directors?
There are lenders out there whose criteria better suit someone who’s a managing director. The deals lenders offer tend to be the same across the board, but some may look at a director’s income more positively than other lenders would.
So although the deal itself isn’t tailored to company directors, certain lenders suit them better than others.
How do I prove my income and document my trading history?
The most common way of evidencing your income if you’re a company director is using your salary and dividends. These are always shown on what’s called a Tax Calculation or an SA302, as HMRC refers to that document. It’s essentially an annual pay slip for someone who earns income outside of the PAYE bracket.
If you receive a salary from a limited company, plus dividends, or if you receive income from property, you will have to submit a tax return at the end of the financial year. That’s the documentation you need to prove what you’ve earnt that year, and that you’ve paid tax on it.
Another way you could prove your income specifically as a managing director would be with your company accounts. Some lenders might look at the salary portion of your income, but they might also look at the net profit from the business. Generally that’s easy enough to get from your accounts. It really depends on the lender how they’re going to look at and assess your income.
What if I have a fluctuating income?
There will be a few different ways that lenders will approach income. Generally speaking, self-employed people or managing directors are likely to have a fluctuating income. It’s very rare that they have a consistent income from earnings year to year. It depends on many different factors.
Some lenders would take an average of the last two years or even the last three years. We will pick a lender that gives you the best result in that instance. Some will just look at the latest year – so if your income is on the up, that could be more beneficial for you.
But if your income is on the way down, most lenders will look at the latest year rather than taking an average. It’s become rather messy off the back of Covid, as naturally people’s profits and incomes have been very inconsistent.
What about PAYE income and retained profit – how do these work for a company director mortgage?
Most directors pay themselves a basic salary. Accountants generally advise people to take a salary of around £8,500 to £9,000 per year as PAYE, and anything on top of that tends to be dividends. This tends to be the best way to pay yourself without having to go into National Insurance and tax brackets. Normally that’s treated in the same way as anyone’s PAYE income.
Retained profit is a little bit more technical so it’s more difficult to give a straight answer. Some lenders will look at profits left in your business, and some just wouldn’t entertain it. It really depends on the lender.
If you do have a buildup of retained profits each year, and that’s consistently the case, you can include that to improve the overall affordability calculation. I know that’s a vague answer, but it really depends on the lender you look at and your specific situation.
How much can I borrow and what sort of deposit will I need?
That’s a very natural question for people to ask. The standard answer is that the minimum deposit available anywhere is 5%. The bigger your deposit, the easier you’re going to find it to secure a mortgage. That’s true regardless of whether you’re employed, self-employed, a contractor or in any other type of employment.
In terms of borrowing, it’s all about the income figure the lender puts into their calculations. Let’s say they assess that your annual income is £50,000 – one they have a figure it’s almost exactly the same as putting in a PAYE income. So achieving the maximum loan is all about how you get there. That’s what we’ll look at for you to get the right outcome.
What else do we need to know about limited company director mortgages?
The real takeaway from this is that there aren’t any straight answers. I have to be very vague from a managing director’s point of view, and that really just alludes to the fact that you need to really sit down and go through your options.
I would urge you to seek that advice. I can almost guarantee that if someone in this situation tries to tackle this themselves, the outcome they would get just wouldn’t be anywhere near as good as with an expert broker on your side.
Your home may be repossessed if you do not keep up with your mortgage repayments.