How to get a Mortgage if You’re a Company Director

If you’re a director of a limited company it can sometimes feel even harder for you to get a mortgage than for one of your employees, but there’s a few ways you can make the process more straightforward.

By following this step by step guide you’ll have a much clearer understanding of what you can do to give your mortgage application a far better chance of success.

Getting a mortgage if you’re a company director

There’s a common misconception that company directors need to apply for a different type of mortgage to get accepted but that’s just not the case at all. If you’re a business owner then you’re eligible for the same range of mortgages as anyone else.

Even though you’re technically classed as an employee, your income will be assessed for affordability purposes on a self-employed basis.

As a result, the proof of income you’ll be asked to provide by a lender will be different from that of a salaried employee.

The reason for this is quite simple; the basic annual salary a director takes from their business doesn’t tell the whole story about their overall remuneration.

The more evidence of your entire earnings you include, the better your chances are of getting a mortgage.

What income can you include?

There’s usually two different ways a company director will pay themselves from the profits their business makes, both of which can be included as proof of income for a mortgage:

From a tax perspective, it’s much more beneficial to take a small basic salary and pay yourself a higher amount in dividends, retaining more profits in the business.

This is fine if the combined earnings of both salary and dividends provides sufficient proof that you can afford the mortgage you’re looking for. But if it’s not, what options do you have?

The good news is there’s a number of lenders who have a deeper understanding of how a company director’s remuneration works and will also recognise the retained profits in a business as further evidence of your earnings.

This can provide quite a boost, in terms of how much you may be able to borrow.

How to get a mortgage based on salary and dividend income

Most lenders will expect to see a company director’s proof of income combining a mixture of both salary and dividends.

Before submitting an application, there’s a couple of steps you can take to ensure the process is smoother and increase your chances of approval:

Step 1. Prepare all your documentation

In order for a lender to get a full picture of your earnings and understand how it’s been accumulated, they’ll want to see copies of the following documents:

• 2-3 years certified business accounts
• SA302 statements or tax year overview from HMRC
• Latest (3-6 months) business bank statements

It’s important that you check both your accounts and SA302 statements to ensure they accurately reflect the salary and dividend income you’ve received.

If your accounts don’t show any evidence of the dividend payments – don’t panic! Just ask your accountant to draft a separate letter confirming the amounts and when they were paid.

Once you’ve got all the evidence of your earnings prepared and in hand, you’re ready to submit an application. So, which lenders should you approach?

Step 2. Speak with an experienced mortgage broker

All mortgage lenders are guided by the same type of rules but don’t all use the same eligibility criteria.

This means some lenders could look more favourably on an application from a company director than others. How do you find out who will and who won’t?

Speaking with an expert mortgage broker who specialises in helping company directors, rather than going directly to a lender, is one of the smartest decisions you can make.

This is particularly important if your income situation is more complex than others.

Not only will the right broker be able to identify the lenders who are best placed to consider all the complexities involved with your application, they can also help you prepare all the supporting evidence you’ll need.

In effect, what you’re doing is hiring someone to manage your application on your behalf, giving it the best possible chance of success, while also saving you lots of time.

How to get a mortgage based on salary and retained profits

The vast majority of lenders will only take into account the actual income you’ve drawn from the business, through salary and dividends, when assessing affordability. Profits retained in the business won’t be included.

If this is the case, the income you declare may not be enough to get the mortgage you’re looking for, especially if you’ve taken a modest salary in an effort to keep more profits in the business for, say, expansion opportunities.

For lots of company directors this can seem slightly unfair. At the end of the day, the net profits your business makes, once all tax liabilities have been paid, are yours to use whenever and however you like. Sadly, not all lenders see it this way.

Ask your broker

The good news is there are a number of lenders who view net profits as your money, whether you’ve chosen to take them out as dividends or not. In most cases, you’ll be able to choose between basing the amount you can borrow on a combination of either salary and dividends or salary and net profits.

As you can see from the example given above, this can make a significant difference to the amount you may be able to borrow.

Once you’ve prepared all your accounts, speak with your broker and work out which is the most beneficial route to take.

They can then identify for you the lenders who will base their affordability criteria on a net profit calculation, rather than just salary and dividends.

How much can a company director borrow?

This will vary from lender to lender and with the introduction of the mortgage market review in 2014 (MMR) there’s also much more focus on checking both income and outgoings when making a final decision.

It’s not just what you earn that counts, it’s also what you can afford to pay from disposable income.

However, as a general rule, most lenders tend to use an income multiple of anywhere between 4 and 5 times the annual combined earnings – salary and dividends – you take from the company.

Try our calculator below to get a rough idea of your maximum borrowing. Select ‘Company director’ from the dropdown menu for ‘Trading style’ to get started.

Example calculation

If your combined earnings (salary & dividends) are £40,000 and your lender uses an income multiple of 4, then they could be prepared to lend as much as £160,000.

This is where the inclusion of retained profits can make a significant difference. Using the same example, let’s also say your share of the business’ retained profits is £100,000. If a lender is willing to use both your income AND retained profits this means they could be prepared to lend as much as £560,000 (£140,000 x 4).

So, if you’re a company director, finding the right lenders who will take your overall earnings into account could be crucial to securing the mortgage you need.

How many years’ certified accounts do you need?

Three years’ certified accounts is the preferable starting point with most lenders, but if you’ve only got two years’, again – don’t panic! There’s still plenty who will consider this enough time to base their affordability criteria on.

In some cases only one year is needed, although, it does get much harder to get approval at this point. You can make a difference here by asking your accountant to produce income projections for future years, if you’ve already agreed work contracts with new clients.

The professional field you work in can also make a difference, particularly if you only have one or two years’ worth of accounts.

For example, if you’re a doctor or a dentist and have only recently switched to a limited company, make sure you provide evidence of your recent employment history with the application.

Tips to improve your eligibility

There’s a number of other factors that can improve the chances of your mortgage application being successful.

The additional steps you can take include:

Get matched with a broker who specialises in company director mortgages

Getting a mortgage if you’re a company director is not necessarily more difficult, but it can be more complex if you’re not sure what types of income you can include as evidence of earnings and which lenders will look more favourably on your application.

The shrewdest decision you can make in this process is asking for assistance from a mortgage broker who understands what is required to get an application such as this over the line. They’re inside knowledge and lender contacts could make all the difference.

Call 0808 189 0463 or make an enquiry and we can arrange a free, no-obligation call with a mortgage broker with experience in assisting self-employed people today.