Many limited company directors experience difficulties applying for a mortgage, regardless of the nature of their business and seniority within the organisation!
That is because, while a directorship is a high-level role, a mortgage lender treats directors as self-employed applicants and, therefore, a higher risk prospect.
Self-employed individuals often maximise their tax-deductible expenses to avoid unnecessarily paying income tax against their earnings, which also means that their verified income may appear understated.
An employee with a lower wage bracket typically finds the mortgage process easier simply because a lender can quickly verify their future earnings and complete checks such as affordability assessments.
Today Think Plutus explains some of the complications of mortgages for limited company directors, with guidance about completing your application smoothly and successfully.
Mortgage Eligibility Criteria for Limited Company Directors
As we have explained, a mortgage provider deems a limited company director a self-employed applicant, which can mean that some lenders will be unlikely to lend or offer higher rates or charges.
Think Plutus is a whole-of-market, private broker. We always advise self-employed applicants to work with an independent professional to ensure they select appropriate lenders with suitable eligibility policies.
Every lender has a different set of rules. While there are mortgages specifically designed for directors and lenders specialising in this customer base, how you declare and report your income may impact the outcome.
Below we have run through each of the typical eligibility rules to illustrate the information you need to include.
Business Trading Records
Most lenders will only consider a limited company director if the business has been trading for at least one year.
There are exceptions for some professions, such as mortgages for doctors, who are seen as less risky and do not always need a minimum trading history to prove their future income.
Ideally, you should be able to produce two years of full accounts.
- With less than one year of trading, you will usually find it difficult to secure a mortgage unless you have future contracts or ongoing agreements that guarantee income over the next 12 months.
- Directors with one to two years of experience will have one full set of accounts, although many lenders need to see two years of financial records. Some mortgage providers will accept one years’ accounts and income history, but this is less common.
- After two or more years of trading and accounting history, most mortgage providers will consider the application.
In short, the more records, tax returns and financial statements you have, the stronger the application and the easier it is for the lender to complete their lending assessments.
Minimum deposits for company directors or business owner mortgage applicants vary and will depend on whether you have any other issues such as adverse credit, lack of trading history or insufficient proof of earnings.
Simple applications normally need at least a 5% deposit, whereas a complex case that requires a specialist lender will usually require at least 15% as a down payment.
If you have a higher deposit, the mortgage you apply for is at a lower Loan to Value ratio (the amount you wish to borrow as a ratio against the property’s value).
Lower LTVs are appealing, so a larger deposit will improve your approval prospects and mean you attract a more competitive mortgage interest rate.
Mortgage Borrowing Limits
Maximum mortgages for limited company directors also vary between lenders, but most have an upper cap, expressed as an LTV.
As a rough guide, mortgage providers tend to set their LTV as below, depending on the value of the mortgage application:
|Mortgage Value||Maximum LTV|
|Up to £570,000||95%|
|£570,000 - £750,000||90%|
|£750,000 - £1 million||85%|
|£1 million - £2 million||80%|
|£2 million - £5 million||70%|
|£5 million and above||50%|
These are indications, and much depends on whether there are other mitigating factors or reasons the lender considers the application a higher risk and therefore requires a larger deposit.
Your income is a key factor in applying for a mortgage as a limited company director. A lender will need to assess your outgoings, business profitability and existing debts, as well as your average earnings.
If a director applies for a mortgage with a perfect credit record, they may be able to borrow up to five times their annual income as an absolute maximum – most lenders are more likely to offer four or 4.5 times yearly earnings.
Adverse credit or other factors will reduce this income multiple and mean that the mortgage value could be up to around four times earnings, depending on the lender.
Mortgage Income Calculations for Limited Company Directors
Calculating an average annual income is less than straightforward.
Lenders use various calculation methods to determine your earnings, which also vary between sole traders, directors of a partnership or limited company directors.
While purely an overview, most lenders will consider a sole trader’s net profit as their income and take the share of the business net profits in a partnership as the income figure for their affordability assessment.
Limited company directors are different because their income usually comprises several sources, such as:
- Regular salary
- Share of net profit
Directors commonly leave profits within the business rather than drawing 100% of the net profit as personal income.
Specialist lenders will include net profits (based on shareholding or ownership), but others will only use salary and dividend income in their mortgage assessments.
Your choice of lender is, therefore, pivotal.
For example, if you run a business with £200,000 net profit and draw £10,000 in salary and £30,000 dividends, one lender might assess your mortgage application based on an income of £40,000, and another based on £110,000 assuming you own 50% of the company.
This factor is why many limited company directors are turned down for a mortgage (even if they run a very successful business!).
Documentation Required for a Company Director Mortgage Application
The more supporting information and documentation you can provide with your mortgage application, the less legwork the lender has to do, and the better your approval changes.
You may need to provide copies of:
- Finalised accounts (including full financial statements if you file abbreviated reports with Companies House).
- Self-assessment tax return documents such as your tax calculation or SA302 form.
- A reference from a qualified accountant either detailing your income or verifying the accuracy of your accounts.
- Three months of personal and business bank statements.
Some lenders may only request one or the other, such as a set of accounts OR self-employment tax return information, but it is helpful to have everything available.
Potential Issues When Applying for a Mortgage as a Director
Several factors may increase the importance of applying to a niche mortgage provider, making it essential to consult an independent broker.
Adverse Credit Issues
Credit reports are an integral part of every mortgage assessment. Like any other mortgage, your lending options will be limited if you have a low credit score or a history of credit difficulties.
As always, this varies between lenders; some will take very different positions in assessing an applicant with bad credit.
Loss Making Companies
If your company has filed a loss within the last three years, you may also find that a high street lender automatically refuses a mortgage application.
Recent losses are more detrimental than a loss three years ago, but the lender might perceive that the business is struggling and that your future earnings are less than certain.
Specialist lenders who focus on limited company directors will often be more likely to lend. Still, we strongly recommend working with an experienced broker to ensure that any underwriter concerns are addressed.
Changes to Trading Style
Another potential issue is where you have changed your trading style. For example, if you operated as a sole trader and have recently incorporated your business into a limited company, the timings will be a consideration.
If you registered a business change over three years ago, it is less likely to raise a query.
More recent changes mean that most lenders will consider the company a new entity, even if you have been trading for decades under a different trading style.
Likewise, if you have less than two or three years of accounting records for the current business structure, a mainstream lender is much less likely to offer a mortgage.
Applying for a Mortgage Based on Last Year’s Accounts
Fluctuations in revenue and profits are a normal part of business, and most sectors have slow periods and some that are better.
In many cases, the company will make less profit during the early stages or might have reduced profits in years when they have invested in new equipment or expanded their workforce.
The challenge for a limited company director is that a mortgage lender will normally use an average income figure over the last three years, regardless of whether trade has picked up significantly since then.
For example, your bottom line could look like this:
- £10,000 net profit in year one.
- £20,000 net profit in year two.
- £45,000 net profit in year three.
A high street lender will take an average of £25,000 profit per year and multiply that by up to five to arrive at a maximum mortgage cap of £125,000.
Specialist lenders may be happy to consider your income as £45,000 a year (particularly if you can show contracts or forecasts that sustain this profitability). They could offer up to £225,000 on the same basis.
Straightforward Help Applying for a Mortgage as a Limited Company Director
As this guide has illustrated, there are numerous factors and considerations when applying for a limited company director mortgage and a huge variation in the attitude of lenders.
Think Plutus has years of experience negotiating self-employed mortgages for a broad range of applicants and can steer you through the process from start to finish.
We recognise that every directorship and business is unique. Please contact us to arrange a good time to discuss your mortgage requirements and start structuring a strong application.
For mortgages for company directors made easy, Think Plutus.
Frequently Asked Questions
Our mortgage consultants have answered some of the most commonly asked questions about mortgages for company directors below to shed further light on this lending niche!
Can I Remortgage to Reinvest in My Limited Company?
Potentially. You can raise capital through a remortgage and use that to finance several outgoings such as home improvements, investing in a buy-to-let asset, or paying for a holiday.
While it is possible to remortgage and use the cash to invest in your company, this is not an easy option, especially if you are applying to a high street lender.
If you would like to explore the option of remortgaging for business investment, please contact Think Plutus for more detailed guidance.
What Happens if I Need a Mortgage as a Director, But My Accountant Minimises My Reported Profits for Tax Purposes?
This problem is extremely common, so the first thing to point out is that you are far from alone!
It makes sense to claim every eligible expense and tax allowance to avoid paying more tax than necessary, but that also means that your declared income may look much lower than in reality.
The solution is to contact Think Plutus to analyse your income structure and decide on the right approach and lender to demonstrate affordability.
If your income is too low for the mortgage you wish to borrow, you can apply to a different lender, private bank or building society that offers a higher multiple of your annual net profit average.
How Quickly Can Think Plutus Find Me a Limited Company Director Mortgage?
We are conscious that many clients have hectic schedules and do not have hours to spend compiling applications, drawing up paperwork or answering mortgage lender queries.
Think Plutus works around your availability and deals with the bulk of the paperwork to expedite your mortgage application.
Please let us know if you are keen to move forward quickly, and we will be happy to run through some realistic timescales, so you know what to expect.
Can I Use a Directorship Mortgage to Pay Extra Towards My Mortgage?
Yes, flexible mortgages allow additional repayments or overpayments, so you can pay down your mortgage quicker and reduce your overall interest costs.
Get in touch for more information about flexible mortgages and the best options if you want to make capital repayments without incurring heavy charges.
Are There Mortgages for Limited Company Directors With Bad Credit?
Not many high street lenders work with bad credit applicants and are far less likely to offer a mortgage to a director with adverse credit.
Much depends on the nature of the credit issues and how recently they occurred, but the best option is undoubtedly a niche provider rather than a high street bank. The latter usually have very strict policies about lending to applicants with issues on their credit reports.
Can I Get a Mortgage as a Director With a Loss-Making Company?
If your company has filed loss-making accounts in the last three years, finding a mortgage with a regular bank can be impossible because the lack of income reliability presents a risk.
Losses declared in the last trading period further exacerbate the issue unless you have reported a loss due to drawing a personal salary from the company profits – if you work with a broker who can explain this to the underwriter, it may be accepted.
Business losses two or more years ago and where the company has since recovered are less of an issue.
Can I Apply for a Mortgage Based on My Company’s Last Year’s Trading?
Yes, some lenders will decide on a case-by-case basis and accept that a growing business has made more profit in the last year than before.
This factor can make a huge difference to your maximum mortgage value – if you made £20,000 in years one and two but £50,000 in year three, a mainstream lender would calculate your income as £30,000 a year.
A specialist mortgage provider might use the latest figures and base your mortgage evaluation on £50,000 income per year.
The outcome is that Lender A might offer a mortgage of up to £150,000 but Lender B can lend up to £250,000.
Do I Need Accountant Certified Accounts to Apply for a Mortgage?
Not necessarily – some lenders will accept your tax return information as evidence of income.
If you wish to apply for a mortgage without the added expense of hiring an accountant to verify your financial statements, please get in touch for more advice about the appropriate lenders.