How to get a mortgage as a LTD Company Director

 

Securing a mortgage in any line of work can be challenging even for those in long term employment, especially in today’s market. With many lenders offering different maximum loan amounts for employed applicants depending on their level of guaranteed income and outgoings and different terms for different types of borrowing. 

 

 

Well luckily for you, as an LTD company director you have 2 ways in which your income can be assessed by lenders. Many residential mrotgage lenders will use the income you have taken from the business, so salary and dividends. Most will average out your last 2 years of income, if your most recent year is your highest, they will use your average. If your most recent year is the lower of the 2, then they will likely use the lower figure for their assessment. 

 

However, some lenders will use your salary and your share of the company net profit when calculating your mortgage affordability. The amount they can use will depend on your shareholding that is evidence on companies’ house. For example, if your company made a profit of £50,000 in the most recent year and you are a 50% shareholder of that company you can use your salary for the latest year plus £25,000 of net profit income. You do not need to have taken this money out of the business as lenders understand you do not take out 100% of the profit in a business each year, so that you have money left in the business for continuity. 

 

If your dividend amount exceeds the company net profit the lender will use the lower of the 2 figures as continuing to take more money out of the business than it is generating is not sustainable. 

 

This method can often stretch your income further as very few business owners take 100% of their net profit out of their business each year. So often your dividend figure is lower than your profit figure. Therefore, using the higher net profit figure can get you a higher mortgage amount. 

 

There is a caveat to this, your shareholding must be at least 25% of the company in order for the lender to accept this and not every lender will accept this method of affordability. A handful of the ‘big 6’ high street lenders do accept net profit such as HSBC, Virgin and Halifax. Any director with a shareholding less than 25% will still be classed as self employed but the lender will only take your salary and dividends into account. 

 

We have a 50% shareholder of an LTD company. Their salary for the last 2 years was £12,500 each year and dividends of £20,000 each year. Their company made a net profit of £80,000 each year, of which £40,000 of it is their share. (keeping the numbers the same each year for ease). If they were to use either of these 2 methods above, they could expect a maximum loan of: 

Salary & Dividends combined total of £32,500 = £149,500 maximum mortgage 

Salary & Net profit combined total of £52,500 = £249,350 maximum mortgage 

 

As you can see switching from dividends to their share of net profit can drastically improve the amount of money you can borrow on a mortgage! 

 

So you have decided what affordability assessment works for you, but what do you need to satisfy the lender? 

 

Firstly 99% of lenders require 2 years trading history as a LTD company, so either 2 years of trading from inception (if you started the business) or if you have joined the company as a shareholding director after it was formed, 2 years history of you being in the business in that capacity. Lenders will want to see your last 2 years Sa302s – your tax calculations to evidence the salary and dividends you have taken out of the business plus the last 2-year finalised business accounts. They must be finalised and registered on companies’ house to be accepted, you cannot use draft accounts. 

 

Some lenders will ask for the last 3 months business bank statements to evidence its current trading activity. As your company accounts are only submitted once per year, they do not show an accurate reflection of how your business is operating at the time of mortgage application. This is especially true if you are applying for a mortgage months after your year end. 

 

An extra layer of evidence lenders may require is a reference from your accountant to document the last 2 years company activity and its projected performance in the near future to give the lender confidence. 

 

Not all lenders ask for each of these documents, but to be best prepared and to make your advisers life easier we recommend having all of these documents ready for your initial appointment. This way your adviser has every bit of information to calculate your income and see which affordability method is going to get the result you need. Then when you come to submit a full mortgage application your adviser already has all of the docuemnts the lender could possibly ask for when they come to submit your application. 

 

The key point here is to use an independent broker (like ourselves!) who has access to lenders from across the wider market who can access these lenders who use different affordability assessments. 

 

We hope after reading this you can see that getting a mortgage as a LTD company director isnt harder than it is for an employed applicant and that it can be used for your advantage.