Limited Company Director Mortgages

Limited Company Director Mortgage

Kevin Spear talks us through mortgages for limited company directors.

What are the eligibility criteria for obtaining a mortgage as a limited company director?

A limited company director applies for mortgages the same way anybody else does. We’ll approach the lender with the required documentation, fill out an application form, get a credit report… all the normal processes.

It’s how you access that particular mortgage and lender that can differ. Individual lenders will require different paperwork.

From an eligibility perspective, you must be aged 18 or older, have enough income to cover the mortgage for a given period of time and have a sufficient deposit to complete the transaction and buy the property.

Your credit score will also come into play. It really is down to the individual situation – as a broker we will match your situation with an appropriate mortgage in the market.

What documents are typically required when applying for a limited company director mortgage?

If you’re a limited company director the documentation is quite different from an employee.

Typically a director pays themself some salary and some dividends. They may leave profit within the company to maintain cash flow. Different lenders will look at salary and dividends together as the individual’s income – they then use the usual multiples to assess affordability.

Some lenders will take into consideration salary, dividends plus retained profit. In other words, they’ll allow for dividends that haven’t been taken. That can often be a higher income number, which means a higher loan amount. So, if we’re looking for a maximum loan we tend to choose that route.

The source of documentation required will be P60s, payslips and evidence of dividends via tax returns. Typically you need two years’ personal tax returns for the director applying for the mortgage.

We don’t need company accounts for two or three years – the lender is looking at you as an individual and how you submit income via HMRC.

How do lenders assess the income of limited company directors for mortgage purposes?

It’s just the same as any other borrower – they’re looking at three payslips, a P60 and then two years’ HMRC submissions, detailing dividend income and salary to verify what the individual director is paying themselves.

How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?

This is actually quite important because it’s often the variable between different lenders. A lot of lenders will just take salary and dividends. So if you pay yourself £50,000 in dividends and there’s £100,000 worth of profit in the company, then arguably half of that income is not being looked at by the lender in the affordability assessment.

Where we’re looking for the maximum loan available, we might approach other lenders who ignore the dividends you’ve taken and instead use all the profit attributable to you as the director. That’s included in the income multiple as well as the salary.

So if a director leaves half of the profit in the company, that’s a lot of income that might ordinarily be missed. There’s no difference in interest rate; you’re not being penalised by the lender for using that retained profits calculation. So it comes down to the individual applicant as to how much they need for the mortgage. That directs where we go and whether we include retained profits.

Can I still get a mortgage if I have a limited trading history as a company director?

It varies from lender to lender. Most will require a minimum of two years’ trading – but what we’re actually looking for is two years’ personal tax submissions from that director. That often involves more than two years’ trading.

If you have been operating for a shorter time span than that, some lenders will just take 12 months’ figures. Rates can be slightly higher in that situation because effectively it’s a riskier transaction for the lender. There’s less information to go on.

So, in summary, if you have one year’s trading, we can get a mortgage on that basis but it will be a little bit more expensive and there are fewer lenders to choose from.

Are there any tax implications or considerations for limited company directors obtaining a mortgage?

There aren’t any specific tax considerations for the individual, other than the fact that they’ve got to provide documentation. It’s just like any individual getting a mortgage as far as the tax situation is concerned.

How can I improve my chances of getting approved for a limited company director mortgage?

The easiest way is to just be very clear with documentation. Keep records straight with HMRC – filing your tax returns on time and making sure that salary payments are made in line with HMRC requirements.

It’s helpful to have real-time information (RTI), via a system that allows self-employed people and company directors to pay themselves with a monthly submission. That takes care of the salary issue. The personal tax returns take care of the dividend issue.

Make sure those things are done on time, then, when a mortgage broker asks you for the details, it’s simple. Where it starts to get a little bit tricky is if people are behind with tax returns, they’ve filed late or they haven’t paid all of their tax bill.

Perhaps they’re in an arrangement to pay for past tax owed – those types of situations are quite tricky and it helps to avoid them when looking at a mortgage.

Can I use a limited company director mortgage to purchase a Buy to Let property?

A lender would approach a company director in exactly the same way as any other individual. Buy to Let lenders often have a minimum income requirement, which is typically £25,000.

But the Buy to Let transaction in isolation is self-funding. So verifying that £25,000 minimum income just means looking at pay slips and personal tax submissions detailing dividends taken and any other income.

Can I remortgage a property as a limited company director?

Yes, depending on all of the usual factors around the application – income, credit file, etc. As long as the declared income to HMRC Is enough to work the income multiples with the lender, that’s fine.

Where it can sometimes be more challenging is if someone’s employment status has changed. Perhaps they were employed when they first applied for the mortgage, now five years later they’re running their own business as a company director.

It could be a little bit tricky if the income is lower than when they purchased the property – but we don’t tend to find that people end up earning less once they’re self-employed.

In short, it’s pretty straightforward – as long as your HMRC files are up to date then it’s fine.

Your home may be repossessed if you do not keep up with your mortgage repayments.