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Limited Company Director Mortgage (Part 1)
How does the mortgage process work for a limited company director?
It is about how the lenders look at income for a limited company director, they are going to want to see some documents to prove the income received from the limited company and to confirm that there is sufficient trading history; we will go into this in more detail later. However, essentially, the process is the same as it would be for anyone applying for a mortgage.
Are there any specific mortgage products designed for limited company directors?
There are a handful of products that are specifically aimed at self-employed clients, whether that’s a sole trader or a limited company. However, those who generate their income from self-employment generally have access to standard products and do not need to apply for specific products.
Do many lenders offer mortgages to limited company directors then?
Yes. There’s a bit of a stigma that lenders don’t like to lend if you’re self-employed, but it’s just not the case.
During COVID some lenders did apply restrictions to self-employed clients, and they were asking more questions to ensure the stability of the business through that period and in some cases loan to value restrictions were being applied, however the lenders have now moved past this. Lenders are offering the same mortgages to employed clients as to self-employed clients.
What are the eligibility criteria for obtaining a mortgage as a limited company director?
Generally, lenders like to see two years’ trading history, although there are a handful of lenders that will look at one year’s full books.
Alongside that, they’re going to look at your percentage share in the business; to be classed as a self-employed director of a limited company, some lenders need you to have 20% shares in the business, and with others it’s 25%. If your shares are below that, they might treat you as employed. Those are both conversations we would have in the beginning of your journey with us to determine which way a lender is going to look at your income from the company.
What documents are typically required when applying for a mortgage as a limited company director?
Generally, we need the latest two years’ trading accounts, signed off by your accountant. Also, your latest two years’ tax calculations, also known as SA302s, to evidence what you’ve taken out of the business.
Lenders may also ask to see some business bank statements, to see that your business is still trading at the levels that your accounts show. Lenders want to make sure that the company is profitable and performing well.
How do lenders assess the income for limited company directors?
There are a couple of different ways they look at income from a limited company. Some lenders will look at what you’ve taken out of the business – your salary, if you’re taking one, and your dividends. In most cases they will average the last two years or use your latest year if it is lower.
Other lenders will look at the net profit of the business and your share of that. For example, if you’re a 50% shareholder, they’ll look at the net profit for the latest year and take 50% of it, plus any salary.
The benefit of having those different ways of assessing the income is that if you’ve not taken a lot of dividends out – which means you can’t borrow much – perhaps we could look at a lender that will use net profit instead.
How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?
As I mentioned, they will look at how much you’ve taken out of the business during the last 12 months. If the latest year’s dividends are lower than the previous year, they’ll just look at the current year. If it’s higher, they’ll average the two and add them to your salary and that’s what they’ll use to assess your affordability.
Retained profits don’t tend to be used for affordability purposes, but if there is retained profit in the business, that demonstrates that the business is performing well and is stable. They will take that into consideration when looking at the overall profile of the company.
Can I still get a mortgage if I have a limited trading history as a company director?
Yes, there are a handful of lenders that will consider you if you have one full year’s accounts however, anything less than one year’s worth of books isn’t going to work.
If you’ve just gone self-employed as a limited company within the last 12 months and there’s not one full year of books, we’re going to have to wait. The other thing to bear in mind, though, is that if you have previously been trading as a sole trader and have changed that to a limited company, lenders will often be OK with that.
It might be that you’ve got 10 years’ trading as a sole trader and only one year as a limited company. To them, that is 11 years worth of trading history – if it’s the same job. So, in that respect, we could look at both of those incomes.
Are there any advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?
The main one is that there are those different ways of looking at income if you’re the director if a limited company, which makes obtaining a mortgage more accessible if you’re not necessarily taking a lot out of the business as dividends.
Are there any restrictions or limitations on the types of properties that can be purchased as a limited company director?
There were historically some restrictions on Loan to Value during Covid which meant that some limited company directors needed to put in a bigger deposit and the affordability calculations weren’t coming out as high because lenders were being more cautious.
Those restrictions have largely been removed now. Basically, it’s going to be a case of where you fit, criteria-wise, but no, there’s no restrictions on the properties you could look at.
What else do you want to cover before we move to part two?
We do still hear people say that they can’t get a mortgage because they’re self-employed, as a director, a sole trader or in a partnership. That’s just not true. It’s just about looking at the income in the right way.
There are of different ways that lenders will look at self-employed income. Therefore, don’t be afraid to start looking at obtaining a mortgage if earn self-employed income.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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Limited Company Director Mortgage (Part 2)
Can I use my limited company’s profits or assets to support my mortgage application?
In terms of profit, absolutely. There are lenders that will look at your net profit for affordability purposes, so it might be that you haven’t taken a lot of money out of the business in dividends, but you have a healthy net profit. There are lenders that will absolutely look at net profit for affordability to support your mortgage application.
Are there any tax implications or considerations for limited company directors obtaining a mortgage?
I would advise in every instance to speak to your accountant about tax implications with your limited company.
How can I improve my chances of getting approved for a mortgage as a limited company company director?
It’s the same as always – making sure that your income is healthy, and having those two years’ full trading history, that is always beneficial because it gives the lenders confidence that your business is sustainable.
Avoid missing payments through the limited company so you don’t have adverse credit in the business. We have seen instances where a client’s personal credit is fine, but there is adverse on the business’ credit file. Missed payments or defaults within the company could negatively impact your mortgage application.
Maintain your bank account and make sure there are no missed payments there. It’s just the same as a normal mortgage application.
What is the typical interest rate and repayment term as a limited company director?
As we are applying for normal residential mortgages and we’re just using the limited company income to support the application, rather than payslips, etc. the repayment terms follow the same criteria as they would for an employed client. Lenders will look at your age and your ability to work throughout the mortgage term. For example, if you want your mortgage to extend to age 75, but you’re in a heavily manual job, is that going to be realistic? That’s what the lenders are looking at.
Can I get a Buy to Let mortgage as a limited company director?
Yes, if you are looking for a Buy to Let in your personal name, your limited company income could support that. If the lender has a minimum income requirement, they’ll look at it in the same way as an employed job.
There are also limited company Buy to Let mortgages, which are a different kettle of fish, where you buy the property through a limited company. We will probably do another podcast on that at some point.
How does being a guarantor for another person’s mortgage affect my own eligibility as a limited company director?
It will affect you in the same way, regardless of how you earn your income. If you have guaranteed someone else’s mortgage this will be factored into your affordability calculations to ensure that you are able to support both mortgage payments if required.
Can I remortgage a property as a limited company director? What are the potential benefits?
Yes, you could remortgage property in the same way regardless of how you earn your income. Some people will remortgage properties if they have a lot of equity in the property that they want to access, this would be to fund home improvements, or perhaps clear their credit card debts. There are a whole host of reasons why you would remortgage your property.
In terms of being a director, the same rule applies as if you were buying a property. The income will be assessed in the same way. You need to have that same trading history to be able to prove that income, and you need to be able to afford the remortgage.
What happens to the limited company if I’m unable to make mortgage payments on time?
Nothing. Your mortgage is completely separate from your limited company. The mortgages we’re talking about here are residential mortgages that have used your limited company income to support the application. They’re in your personal name and separate from your limited company.
If you’re not able to make your mortgage payments, that’s going to reflect on your personal credit history. As a last resort, lenders could repossess properties when mortgage payments are missed.
Are there any additional costs or fees associated with obtaining a mortgage as a limited company director?
There are no additional costs or fees. We’re just using your limited company income to assess affordability instead of using employed income.
There are a handful of mortgage products that are specifically aimed at self-employed clients, but they’re few and far between. The types of mortgages that we’re talking about here, are residential mortgages where the lenders are just looking at your limited company income to assess affordability.
These are mortgages that are available to anybody on the market. There are no additional fees. You’re not penalised for being a director of a limited company at all.
How can a mortgage broker help with a limited company director’s mortgage?
If you’re a director of a limited company, speak to a mortgage advisor. We could look at the different ways to get the mortgage that you want. We could have a look at your accounts and go to a lender that uses net profit – or just guide you in the right direction.
We also make sure that you’re well packaged for the lender – getting the right documents ready to make the process as smooth as possible once you’ve submitted that mortgage application.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.