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Mortgages for directors

Last updated on 17th January 2024 by Martin Alexander

You’d think that mortgages for directors are easy to get, but it can be challenging. This is because lenders tend to see self-employed borrowers as high-risk.

Typically, the self-employed minimise earnings to pay less tax, but this has drawbacks when applying for a mortgage. Company employees may fly through mortgage approval, whereas company directors can struggle.

A lender’s criteria for self-employed applicants vary considerably, particularly for directors. This is because each lender has unique criteria, and every company is structured differently.

You may have only been trading for a year or have retained profits in the business. Some lenders only consider mortgages for limited company directors who have been trading for three years. In contrast, some lenders will accept directors who have only been trading for one year.

Can a company director get a mortgage?

Mortgages for company directors are possible if the company has been trading for over a year. Almost every lender accepts directors, but income is assessed differently. Some lenders accept retained profits, whereas others won’t, so you must select a lender carefully.

Getting a mortgage can be easier if your company accounts show healthy profits each year. On the other hand, recent losses can make it harder to get a mortgage, as lenders need to be sure you can repay your mortgage.

How much trading history do I need for a mortgage?

The first question we’ll always ask company directors is the length of time you’ve been trading. Trading history is the most significant factor that lenders look for when assessing directors.

Lenders base mortgage assessments around risk. Trading for one year will mean there are fewer lenders to approach. If you’ve been trading for over three years, you’ll have access to most lenders.

Less than 1 year

Finding a mortgage will be difficult if you’ve been trading for less than a year. Some lenders may consider you if you’ve been trading for less than 12 months, but you must have written contracts outlining future income. This is common with doctors and professionals who have recently become self-employed.

Between 1-2 years

If you’ve been trading for one year, you’ll have at least one year’s accounts. As the tax year always starts and finishes in April, the chances are your first year of trading will fall into two different tax years.

This is important as not all lenders will consider you in this situation. Lenders may make you wait until you file your accounts for the second tax year.

The good news is that some lenders won’t make you wait until the next tax year to apply for a mortgage. That’s why it’s crucial to place your application with a lender that suits your criteria.

2 years or more

If you have at least two years of accounts, you should be able to get a mortgage.

Three years of accounts should give you access to every lender as long as your affordability, credit check and loan-to-value all match your declared income.

How much deposit will I need?

As each self-employed mortgage is assessed individually, the deposit amount will vary. If you have good credit and have been trading for over two years, you may only need a 5% deposit for a residential purchase. This is subject to meeting affordability checks.

Although mortgages for directors can be trickier to place, you should have access to the same deals as everybody else. Higher deposits will give you more lenders to choose from, and you should also qualify for better rates.

A 15% deposit can get you a good deal. A large deposit, such as 40%, can ensure you get the best available mortgage rates. You may need a 15-20% deposit with only one year’s trading history.

How much can a director borrow for a mortgage?

Although lenders look at your overall financial picture, income provides an initial guideline for the maximum amount you can borrow. Typically, directors can borrow between three and five times their income, including salaries, dividends and retained company profits.

How will lenders assess my income?

For company directors, lenders will assess a director’s income based on salary, dividends and a share of net profit.

Directors are often advised by their accountants to take a base salary up to the tax-free threshold and then to draw dividends for any further income. As a result, profit can be retained in the business, as you may need capital to keep the company running, not to mention pay less tax! The drawback is that most lenders only consider income withdrawn from the business.

If your company made a profit of £100k, but you only took £20k through a salary and dividends, then high street lenders will base your assessment on £20k. This means the company profit of £100k will be irrelevant. That’s why directors can have problems with mainstream lenders, as repaying a mortgage wouldn’t be a problem.

If you find yourself in a similar situation, our advisors can help. We work with specialist lenders who assess income differently from mainstream lenders. This ensures you get the maximum mortgage possible.

Sole traders applying for a mortgage

If you’re a sole trader, lenders will assess your income based on your net profit. This can be tricky as many sole traders usually show the lowest net profit (legally) possible on their tax returns. The aim of this is to minimise tax bills.

Even if you have a huge turnover, lenders will only pay attention to your net profit. Most lenders usually calculate average net profits from the last 2-3 years of trading history if you have it.

Partnership in a company

If you’re in a partnership, lenders will assess your income based on the share of your net profit. An LLP (Limited Liability Partnership) is assessed on the LLP’s income if the business is applying for a mortgage.

Learn more about LLP mortgages here.

What documents will I need to provide?

As you’re self-employed, lenders will ask for documents proving your income. Some lenders will ask for more proof than others, so we’ve listed them all below.

  • SA302 (request or download online from HMRC)
  • Finalised accounts (from a qualified accountant)
  • Latest three months’ bank statements (personal and business accounts)

It’s important to note that some lenders will require all of the above, with some lenders only requiring parts. The main document that almost every lender will request when assessing directors is your SA302 form. You can download your SA302 forms online from the HMRC portal or request your SA302 forms via post, which can take up to 14 days.

Can I use retained profit in a limited company for a mortgage?

Most mainstream lenders won’t consider profit retained in a company, but other lenders will consider retained company profits. For instance, if you have company profits of £100k, you could get a maximum mortgage of £500k as opposed to a salary of £20k and a mortgage for £100k. The difference is quite staggering!

If you require a larger mortgage than your net profit allows, speak to us today. Our advisors have access to the whole market, allowing them to find lenders that accept company turnover.

Going to a high street lender as a self-employed applicant isn’t how to maximise your borrowing potential. This is especially true if you have retained profits in the company and show a low net profit amount.

Can I get a mortgage using my most recent company accounts?

Sometimes, accounts filed for certain tax years can be lower than usual. This may be due to the company’s startup years, or it could be that there were unexpected overheads, such as an amount spent on marketing or having to hire more employees. This can prove a problem with lenders that assess your company’s income based on the average over a certain period (usually three years).

Take a look at the example:

  • First-year: £8,000 net profit
  • Second-year: £10,000 net profit
  • Third-year: 40,000 net profit

Most lenders will average the above as £19,333, assessing your maximum loan size based on 5x your income. Using the above example, the most you could borrow would be £96,666.

Specialist lenders may only require your most recently filed accounts. If a specialist lender assessed your application using the above example, your maximum mortgage would be £200,000. This is quite a considerable difference. If you’re in a similar situation, you can speak to our advisors.

What if my limited company made a recent loss?

If your company has filed a loss within the last three years, you must speak to an advisor. High street lenders will most likely decline your application based on being a high-risk applicant.

Filing a recent company loss will raise doubts among lenders about whether you can repay a mortgage, especially if the business is making a loss.

If you declared a company loss two or three years ago but have since shown a profit, you may have to apply with a specialist lender. It helps to have an experienced broker who can correctly place your application with the right lender.

An advisor can also then communicate with underwriters should they have any concerns. If the loss is due to a salary being drawn from the company, lenders may overlook this as you’ve still taken an income. This will require an experienced broker to explain this to the underwriter dealing with the application and may need additional documents to prove this, not to mention a specialist lender.

FAQs

If you’ve changed your trading type, for example, from a sole trader to a limited company, then it all depends on when the change took place. If you changed your trading style three or more years ago, then it shouldn’t make any difference when applying for a mortgage.

Your options will be limited if your trading style changed in the last three years. Lenders will treat your company as new, even though you may have held previous accounts under your old trading style. Most lenders will only be interested in your current company and its related accounts. Furthermore, most lenders will require three years of trading history.

You can remortgage to raise capital for your company, but not every lender will allow you to do so.

You’ll need to check if your current lender allows you to remortgage and if they don’t, you’ll need to find a lender that will. If you do switch lenders to raise capital, you could be liable for an early repayment charge (ERC) if you remortgage during your initial period.

Most lenders will allow you to use capital from your limited company towards your mortgage deposit, but not all will. You’ll need to take the deposit as a dividend or director’s loan from your company. You’ll also need to prove that the business won’t be affected and has sufficient capital to continue trading.

Before you apply for a mortgage, an advisor can check whether your lender accepts deposits from limited companies.

As a company director, you can get a mortgage with bad credit by applying with a suitable lender. Not every lender will accept credit issues, and it also depends on how severe and recent your credit issues are. Adverse credit comes in different shapes and sizes, so there isn’t one rule for everyone.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.