Last reviewed on 9th November 2023 by Martin Alexander (Mortgage Advisor)
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.
Lenders’ criteria for self-employed applicants vary considerably, particularly mortgages for directors. This is because each lender has unique criteria, and every business has its own story.
You may have only been trading for a year or have profits retained in the business. Some lenders only consider mortgages for directors who have been trading for three years. In contrast, some lenders won’t consider retained profits at all.
Our advisors have a wealth of experience in this field and secure mortgages for self-employed applicants daily. We’ve written this guide with company directors in mind.
- How much trading history do I need for a mortgage?
- How much deposit will I need?
- What mortgage amount can a director borrow?
- How do mortgages work for directors?
- Can I get a mortgage with retained profit in a limited company?
- What documents does a director need for a mortgage?
- Can I get a mortgage using my most recent company accounts?
- Can I get a mortgage if my company has made a loss?
- FAQs for directors
How much trading history do I need for a mortgage?
The first question we’ll always ask you if you’re self-employed is the length of time you’ve been trading. Trading history is the most significant factor that lenders look for when assessing mortgages for 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 12 months.
You can get a mortgage 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 filed 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 some lenders won’t make you wait until the next tax year to apply for a mortgage. That’s why placing your application with a lender that suits your criteria is crucial.
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.
Having 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.
If you’re still unsure and require an answer tailored to your situation, then you can make an enquiry. One of our advisors can call you to look at your company structure in more detail.
What mortgage amount can a director borrow?
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 do mortgages work for directors?
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 will only consider the income that is 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.
Can I get a mortgage with retained profit in a limited company?
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 you’ll maximise your borrowing potential. This is especially true if you have retained profits in the company and show a low net profit amount.
What documents does a director need for a mortgage?
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 mortgages for 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 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).
For instance, take a look at the example:
- First-year: £8,000 net profit
- Second-year: £10,000 net profit
- Third-year: 40,000 net profit
- Mainstream lender: £96,666 (maximum loan size based on the above figures)
- Specialist lender: £200,000 (maximum loan size based on the above figures)
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. You can speak to our advisors if you’re in a similar situation.
Can I get a mortgage if my company has made a 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 provide the lender with doubt 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 for directors
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.