It’s a common assumption that mortgages for limited company directors are easy to obtain, but in reality, it can be quite a challenge. This is because self-employed borrowers are often viewed as high-risk by many lenders.
It’s not unusual for self-employed people to legally minimise their earnings to keep their tax bills low. The downside of this is that it can make it more difficult when applying for a mortgage. Employees at a company may coast through the mortgage application process whilst limited company directors find it much more of a struggle.
There is great variation between lenders in terms of the assessment criteria for self-employed applicants, and this is particularly true where limited company directors are concerned. Every lender has its own approach and there is a unique story behind every business.
Don’t make the mistake of assuming that mortgages for limited company directors are straightforward. The specialist advisers at Think Plutus work hard to make the process as straightforward and hassle-free as possible. Be advised that whole-of-market access is just one component to being an effective adviser in this field – experience is an invaluable asset that Think Plutus offers.
Our team has secured mortgages for many directors and other types of self-employed applicants. We’ve curated the guide on this page with limited company directors in mind but if you have further questions please get in touch today.
How long have you been in business?
The first question we’ll always put to a self-employed applicant is the length of time you’ve been in business. Trading history is one of the fundamental things lenders will look for when assessing a mortgage application from a limited company director.
Mortgage assessments are based around determining the level of risk. In most cases, the longer you’ve been in business, the stronger your application will be.
If you’ve only been in business less than 12 months then the reality is that you’ll struggle to secure a mortgage. The only thing that may enable you to obtain a mortgage with less than 12 months’ trading history is to have written contracts that guarantee future income. Doctors and professionals who haven’t been trading long quite often have such contracts to support a mortgage application.
If you’ve been trading for 1 year, you will have at least a year’s worth of accounts to show. The tax year starts and ends in April, so your first year of trading will probably be split between 2 different tax years. The result of this is that many lenders will not consider you in these circumstances. They will want to see your accounts for the second tax year so that they can assess a full year’s accounts. There are, however, lenders that will not make you wait until the end of your second tax year. This highlights the importance of finding the right lender for your circumstances when applying.
If you have at least 2 years’ trading and accounting history, the majority of lenders will be willing to consider you for a mortgage. Having 3+ years of accounts should mean every lender will consider you, as long as your credit check, affordability and LTV are all in order as well.
How much deposit will I need?
Self-employed mortgages are assessed individually, so the deposit amount varies.
If your credit record is clean and you have been in business for 2+ years, you may only need a deposit of 5% to secure a residential mortgage. Of course, this is subject to meeting the affordability checks for your requested loan amount. Though it can be more challenging to place mortgages for directors, you should have access to the same deals as other people.
Of course, a higher deposit means a lower LTV, which always gives your application extra strength. You will get a larger pool of lenders to choose from and there will probably be some superb rates available to you. A 15% deposit will get you a good deal, but a large deposit like 40% could give you access to the very best mortgage rates on the market.
If you have poor credit or insufficient trading history, you may need a specialist bad credit mortgage which could require a 15-20% deposit.
If you need an answer about deposits tailored to your unique circumstances, you should get in touch with think Plutus today. Our specialist advisers will be able to collect the pertinent information and give you an idea of the deposit you’ll need.
How much can a company director borrow?
Income has always been the primary factor in determining the maximum mortgage amount a lender will offer. Since the Mortgage Market Review, outgoings have also been assessed alongside income. This is the best way for lenders to make an informed decision about affordability.
Outgoings are just as important as income in determining whether an applicant can afford mortgage repayments. It allows lenders to assess if the amount you have coming in after paying out your regular outgoings will be sufficient to keep up with monthly repayments. Lenders will assess your broader financial picture, but income is still the fundamental guideline for determining the maximum amount you can borrow.
Though we’re focused on mortgages for directors, we’ll look at employed people to highlight the general market.
An employed person with clean credit (or perhaps minor credit issues) will generally be able to borrow up to 5x their annual income. Applicants with adverse credit can usually get up to 4x their annual income. When it comes to assessing an application from a self-employed person, there is significant variation between lenders.
Sole traders seeking a mortgage
If you’re self-employed as a sole trader, lenders will assess your income based on your net profit. The issue with this is that many sole traders choose to show the lowest net profit they can (within legal parameters) on their self-assessment in order to minimise tax bills. Even if your turnover is very high, lenders will only pay attention to your net profit. They will usually calculate the net profit from the last 2-3 years of accounts history (if you have it).
Partners in a company
If you are in a partnership, your income will be assessed based on your share in the net profit. A Limited Liability Partnership (LLP) is assessed on the LLP’s income when it is the actual business that is applying for a mortgage.
How to get a mortgage as a limited company director
With limited companies, a director’s income will be assessed based on the salary they pay themselves from the business. Salaries will be accounted for alongside things like dividends and/or share of net profit.
Accountants often advise directors to give themselves a base salary within the tax-free threshold and draw dividends to provide any further income. This means that much of the profit remains in the business. In addition to minimising the director’s tax, this approach means the business retains finances that could be used to expand.
The disadvantage of this approach is that, for a mortgage application, lenders will only assess affordability based on income that is taken out from the business. If your company made £100,000 in net profit, but your salary and dividends only amounted to £30,000, high street lenders will only assess you on the salary and dividends, ignoring the company profits altogether. This is one of the most common stumbling blocks with mortgages for limited company directors where mainstream lenders are involved – in reality, making mortgage repayments would not be a problem, but the numbers considered don’t back that up.
If you find yourself in this situation, Think Plutus can help. We have access to specialist lenders who will take a different approach to mainstream lenders when assessing your income. This can ensure you are getting the best mortgage available to you from the full market.
Mortgage with retained profit in a limited company
As explained above, mainstream lenders will not consider any profit that is retained in the company. You will need to seek out specialist lenders that are willing to consider retained company profits.
By approaching the right lender, company net profit of £100,000 could mean lenders will consider you for a maximum loan amount of £500,000. Mainstream lenders, meanwhile, might only consider your combined £30,000 salary and dividends, for a maximum loan of £150,000. The difference is enormous.
If you need a larger mortgage than your salary and dividends can get you, or you’ve been turned down, contact Think Plutus. Our experts can explore the full mortgage market, so we can source highly competitive mortgages for limited company directors.
If you’re a self-employed limited company director, you will never get your maximum borrowing potential by approaching a high-street lender. If you have retained profits in your company, and your salary and/or dividends are low, then this is especially pertinent for you.
What documents will I need as proof of income?
As a self-employed individual, you will be asked for certain documents to prove your income. The amount of proof required is higher from some lenders than others, so here are all the documents you are likely to be based for:
- Full Finalised accounts (from an accountant)
- SA302 (download online or request from HMRC)
- Last 3 months’ bank statements (personal and business)
Please note that some lenders will ask for all of the above, while others will only require parts.
The document that will be required by virtually every lender when assessing mortgages for directors is the SA302 form. These can be downloaded from your HMRC online portal. You can also request them by post, but it can take up to 14 days for them to arrive.
Mortgages for company directors with adverse credit
If you are a company director with bad credit, your mortgage options will be restricted as many lenders will not consider you. There are many different forms of adverse credit, so there is no one-size-fits-all rule. The severity of the credit issues, and how recent they are, usually make up the main criteria for a lender’s assessment of adverse credit. It may be necessary to consult a bad credit mortgage adviser like Think Plutus if your credit file has issues.
Companies that made a loss
If you are a director of a company that has filed a loss in the last 3 years, you will struggle to get approved for a mortgage. High-street lenders will most likely view you as a high-risk applicant and decline your application. A recent company loss casts doubt in the lender’s mind regarding whether you would be able to make repayments, especially if the business shows signs of struggling.
If your company declared a loss 2-3 years ago but has been profitable ever since, there are specialist lenders who may consider you. The input and insights of an experienced broker can be a tremendous help in this scenario because they can ensure you place your application with the most appropriate lender. The broker will also be able to communicate with underwriters if any concerns are raised.
If the loss comes down to a salary that was withdrawn from the company, some lenders will be willing to overlook this as you’ve still taken an income personally. You will need the advocacy of an experienced broker to explain the situation to an underwriter, and additional documents may be required, not to mention a specialist lender.
Change of company type
If, for example, you’ve switched from being a sole trader to a limited company, lenders will be interested in when the change occurred. If your trading style was changed more than 3 years ago, it shouldn’t be an issue when submitting a mortgage application. If it was in the last 3 years, however, your options may be limited.
In this scenario, lenders will treat your company as new, even if you can show previous accounts under your former trading style. Most lenders will be interested in your company as it currently stands and the related accounts. Mainstream lenders typically require a minimum of 3 years’ accounts, so you can see how problems may arise.
If your circumstances are like this, you will probably need to deal with a specialist lender. Think Plutus can assess your current circumstances and advise on what your next steps should be, including whether any lenders will be willing to consider your application.
Some specialist lenders tailor their services to providing mortgages for directors, and will therefore consider accounts under the trading style you switched from.
Borrowing using most recent years’ figures
Accounts filed for certain tax years can sometimes be quite low. This could be down to them being the company’s start-up years, or perhaps unexpected overheads came up like marketing or onboarding more employees. This can be problematic where lenders assess company income by calculating the average over a certain period (usually 3 years).
- Year 1 net profit: £10,000
- Year 2 net profit: £20,000
- Year 3 net profit: £45,000
Based on these figures, the maximum loan a mainstream lender offers may be £125,000. This is because they will calculate your average income as £25,000 and calculate your maximum loan size as 5x that income. A specialist lender, on the other hand, may be willing to offer up to £225,000. This is because they may only need your most recent filed account of £45,000.
This difference is considerable, so we recommend that you get in touch with Think Plutus to ensure you are approaching the best lender for your circumstances.
Remortgaging for investment purposes
When you need to raise additional funds, remortgaging can be a useful tool. The capital from a remortgage can be used for a number of things, including funding a holiday, undertaking home improvements or investing in a buy-to-let property.
As a company director, you might wish to remortgage to invest more in your business. The reality is that getting a remortgage for this purpose will not be easy, particularly with high street lenders. There are some specialist lenders who may consider a remortgage for business investment. If you wish to explore this possibility, speak to one of the experts at Think Plutus to look into it in detail.
Mortgages for limited company directors made simple
Think Plutus are experts in self-employed mortgages. We’ve dealt with a wide range of applicants who have struggled with mainstream lenders and even other brokers, only to come to us and get approved in a matter of days.
Every case is unique, so we recommend you get in touch today and tell us about your situation so we can get the ball rolling on finding you the most suitable lender and the best possible deal. For mortgages for company directors made easy, Think Plutus.