Limited Company Director Mortgage

How does the mortgage process work for a limited company director? Are there any differences?

The main difference for a limited company director compared to someone on PAYE is in how income is declared to the lender and how they assess it. Apart from that, there’s nothing special about a limited company director mortgage.

Are there any specific mortgage products designed for limited company directors?

The products themselves are not specific to limited company directors. When we talk about mortgage products, we’re really talking about interest rates and how that product operates – whether it’s a fixed rate or a tracker, etc.

The same suite of products are available to limited company directors as to anyone else. It’s just about whether you will be accepted for the mortgage based on your income, as we’ll explore in a moment.

Do many lenders offer mortgages to limited company directors?

Yes, they’re all very open to limited company directors. Each one may assess income slightly differently, but you’re not restricted in the number of lenders.

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

The eligibility criteria is the same for everyone, whether they’re a limited company director or not. We will be looking at your ID, proof of address, credit worthiness and your credit commitments, including any dependents.

Your income is the one bit that will be unique. Other than that there’s not much difference.

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

There are the usual requirements around ID and proof of address. Lenders will also want to see personal bank statements for any application. They may ask for business bank statements at their discretion. Not every lender will ask for that, but they might.

Then, you will need to prove your income with some specific documents, which we will look at next.

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

This is the important bit. We’re talking here about limited company directors, but it’s largely the same for anybody who’s self-employed.

With most limited company directors, your accountant will submit a self-assessment tax return for you as an individual. That’s separate from the accounts for the limited company.

Your personal self-assessment tax return will show the salary and dividends you’ve taken that year. A lot of limited company directors take a basic salary without incurring tax, and the rest of the remuneration is in dividends.

Your self-assessment tax return creates a document called an SA302 or a tax computation, which shows all your income from any sources. If it’s straightforward, it will state your salary, dividends and then a calculation of the tax that’s due to HMRC.

It’s a little bit like a P60 for a self-employed person. That figure is treated by lenders as if it’s your salary. Most lenders then average the last two years to reach an overall income number – although if the most recent year is lower, they’ll take that as it is. If it’s higher than the previous year, they will average it over the two.

That can have quite a big impact if you’ve only been trading for two years. Often, the first year isn’t particularly good, and the second is better. You just need to be mindful of this averaging.

Some lenders will accept just the first year’s SA302. That can be beneficial, particularly for contractors who have moved to a self-employed basis where the level of income hasn’t changed.

Unlike PAYE applicants, the self-employed may have a number of reasons why the amount on that tax document doesn’t reflect the money you’ve had to spend. To give an example, you might have put your own savings into a business to set it up.

You’re then legitimately taking profit from the company to repay that, which is known as a director’s loan repayment. That won’t show on a SA302 because no tax is due on it. You’re perfectly entitled to do that, but it doesn’t help you when applying for a mortgage.

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

This is a very interesting question – it’s this level of nuance that’s important when considering and making an application.

When a director has taken a dividend, it will go on their tax return, and there’s a tax implication depending on the total taken. Perhaps they have profit in the business and don’t want to take the dividend, in which case it would sit in the limited company.

Remember that a limited company is a wholly separate legal entity. You might be the sole director, but it’s not your money until it comes out of the business. Many limited company directors leave profit within the company, which is good for cash flow if they want to invest in other enterprises or equipment.

Whilst that retained profit is sitting in the limited company, most lenders won’t consider it for mortgage purposes – as it belongs to the company. But a couple of niche lenders will consider the retained profit as a form of income, without the director having to realise it. It’s worth taking advice from us on that, because the criteria changes.

The general gist is that they want a credible story as to why the money’s still in the business and whether it’s sustainable. You might have had a one-off big project and made a lot of money, but you wouldn’t usually be making that amount. A lender is unlikely to include that.

However, if you consistently have excess profit that you don’t need to live on, they’re far more likely to consider that as part of your affordability calculation.

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

Yes, potentially. Most of the time you’ll need at least a year. You need to be mindful of how that year falls, because self-assessment documents run to our fiscal year, April to April.

If you only start trading halfway through the fiscal year, you might have limited money to declare. So we’re ideally looking for a year’s trading.

Are there advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?

No. Deciding whether to be a sole trader or a company director should be based on what’s right for the business, and particularly tax and your exposure to liability. There’s a degree of protection within a limited company that you don’t have as a sole trader.

Often for a sole trader it’s slightly easier, because you have no choice but to declare all of your profit on your self-assessment tax return each year. There’s no suggestion of retained profit with a sole trader.

But I wouldn’t change the structure of the business for the purposes of a mortgage – there’s plenty of other ways we can put you in the same position.

Are there any restrictions or limitations on types of property purchased with a limited company director mortgage?

No. That’s a nice easy one.

Is there anything else we need to know about limited company director mortgages?

This is an area where a good adviser comes into their own. Quite often I’ll be working with limited company directors over an extended time whilst they plan for a house purchase.

It’s always better if we can have a conversation before any personal tax returns have been submitted. We might have a three-way conversation with a client and their accountant, which is usually beneficial for everyone. Taking advice is definitely the important thing here.

Key Takeaways:

• Lenders primarily assess income based on your personal self-assessment tax return (SA302 or tax computation), which shows your salary and dividends. Most lenders average the last two years of income.
• While profit retained within the limited company can be good for cash flow, most lenders will not consider it as income for mortgage purposes, as it legally belongs to the company, though some niche lenders may take it into account.
• You will need the usual ID and proof of address, personal bank statements, and specific income proof like the SA302/tax computation. Some lenders may also request business bank statements.
• You will typically need at least one year of trading history to apply. Applicants must be mindful of how the fiscal year (April to April) can impact the amount of income declared on the tax return.
• It is strongly recommended to speak with a mortgage adviser, and potentially your accountant, before submitting personal tax returns to assist in your house purchase plan.
  
  

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.