Limited Company Directors

Are there mortgages tailored to limited company directors?

Self-employed mortgaging is one of my favourite subjects. The simple answer is yes, there are mortgages for company directors, but for most lenders there isn’t a particular range of products specifically designed for this type of customer.

As a mortgage broker we can look at products from an extensive panel of lenders. What’s important is that we look at the income slightly differently for a limited company director compared to somebody in a PAYE job.

How do I prove my income and document my trading history?

There are different ways we can do it. One of the first questions that I would ask a limited company director is what percentage shares do they have in a limited company. For most lenders, someone with less than a 20% share in a company will just be treated as a normal salaried employee.

If you have more than 20% or – for some banks – more than 25% shares in a company, we can look at the income slightly differently.

There are different ways to prove it, depending on different banks, and we might get different outcomes. Let’s imagine I’m dealing with somebody who has 50% shares in a company and has been a limited company director for at least two years – it’s a bit easier to deal with if you have a good track record.

To prove the income I will look at two different sets of documents: first I will see what they earned personally. A lot of limited company directors pay themselves a certain salary, but say they can increase this if needed. Banks aren’t daft – they realise this is easy to manipulate. So most mortgage lenders would look at your tax personal tax returns for the last two complete tax years.

I would expect those documents to show that you’ve drawn a salary. It doesn’t matter if that salary goes up and down month to month, because that self-assessment tax summary is the total for the previous year. Generally speaking, most company directors will take a small salary for tax efficient purposes and draw the rest of their income as dividends. So when we’re looking at income for limited company directors, the majority of the high street banks would look at the salary and dividends over a two year period.

Sometimes a company director will only draw out what they need to pay their monthly bills and lifestyle. There could be a lot of profit in the company that they don’t necessarily need to draw out. They’d rather leave it in the company to build up and expand in future. Some mortgage lenders understand the position here with retained profits.

I’ll also ask my clients for two years of the company’s full accounts. Let’s imagine a scenario where the customer and their company has made £200,000 profit in the last trading year and they own 50% of company shares. 50% of that profit actually belongs to them. They’ve just chosen not to draw it out. So another way of looking at income is to look at their salary, stated as director’s remuneration on the accounts, plus their share of net profits.

For my clients I’ll look at both to decide how to get the closest figure to what we need for the mortgage lender.

Do dividends count as income for a mortgage?

Any dividend income drawn can be used. If you’re looking at the other approach, of using retained profits in a company, this can boost the total as some lenders accept profits before any tax.

If you’re basing mortgage affordability on the retained profit in the company, using the share of profits plus salary, then profit share is taken after dividends have been paid out. So we wouldn’t use dividends on top of profits plus salary. It’s really going to depend on your situation whether we’re going to use dividends or not.