Mortgages for Company Directors
Published 16th August 2017
Directors’ Mortgages – An introduction
Mortgages for limited company directors are easy to obtain if you know where to look! Many self-employed borrowers often struggle to find mortgages and other finance – the reason? Lender policy on income requirements varies widely across the market and can be quite complex, so borrowers declined by banks on the high street turn to brokers for help.
Company director mortgage requirements in particular vary the most lender-to-lender and the real challenge comes with getting the right broker with the right knowledge and experience! Perhaps your company hasn’t got a long history of trading, or you’re not sure what can count as income or maybe you retained some profit in your company for tax efficiency or investment purposes and need a lender that will consider your share of the retained profits as income.
Whatever your situation is, we will pass you to an advisor that has the right experience and the right expertise in this area to get you the best outcome possible. Hundreds of borrowers come to Online Mortgage Advisor having been let down elsewhere, and as the company director specialist advisors we train and work with are experts in this field, we are confident customers will likely get the mortgage they need.
A mortgage broker can claim they’re ‘whole-of-market’, but if they don’t know have a thorough knowledge of company director and self employed mortgage criteria, then theres simply no point in them having access to it.
Below is an in-depth guide for director mortgages. If on reading through you feel like you may be eligible or you want to ask an expert a quick question, please don’t hesitate to get in touch!
Put simply, you need to have been trading for a minimum of 12 months to get a mortgage (the only exception to this is for doctors and other professionals who are potentially eligible with a lesser trading history subject to evidence of contracted future income).
Ideally you’d have a full tax years’ set of accounts, however if your trading year spans across 2 tax years (which often is the case) then there are lenders that consider a rolling 12 months snapshot rather than making you complete the 2nd tax year before applying. If you have ran a business for longer but recently changed trading style, read this section here.
|Straightforward cases||5% (max 95% LTV)|
|Complex cases with specialist lenders||15% (one lender will consider up to 95% LTV)|
For the most part, eligible company owner borrowers are treated the same as any other borrower in terms of deposit requirements, up to 95% loan to value. Things sometimes change when you use the more specialist lenders because they try to mitigate the increased risk against larger deposits. Typically, with a 15% deposit you will have access to the majority of specialist lenders (there is one specialist lender who will consider a 95% loan to value ratio (LTV) in certain circumstances). If you have adverse credit the requirement may be more depending on what the issues are and how recent they are.
Maximum loan amounts
The maximum loan sizes on mortgages for business owners vary lender to lender, but are usually restricted to certain loan to value (LTV) limits. A rough overview is outlined below:
|£0 – £570,000||95%|
|£0 – £750,000||90%|
|£750,001 – £1,000,000||85%|
|£1,000,001 – £2,000,000||80%|
|£2,000,001 – £5,000,000||70%|
|£5,000,000 +||Likely to be approx. 50%|
Income multiples and affordability
Since the roll out of mortgage market review (MMR) many lenders have moved away from typical income multiple models and have implemented more of an affordability based assessment. That said, they do cap lending on mortgages for company directors at certain limits and the income multiple rule still offers a good guide as to the maximum you will be able to borrow.
(some mild adverse can be considered)
|Up to 5x income (by absolute rare exception this may be stretched further in special circumstances).|
|Adverse credit||Up to 4x income (occasionally up to 5x income depending on severity and how recent the issues are).|
“So, what is ‘income’ when I’m self-employed?”
The market is very diverse in terms of lender criteria, so many self-employed borrowers find it tricky to establish what figure to actually multiply. Below is a guide to help you make sense of this:
|Trading style||Income used to calculate affordability|
|Sole trader||Net profit|
|Partnership||Share of net profit|
|Ltd company Director||Salary drawn + Dividends (most lenders)ORShare of net profit (specialist lenders)|
As director of a company your accountant will most likely have recommended you take a salary up to the tax-free threshold, and then dividends for any other income. It is common for directors to want to leave cash in the business to a) avoid paying further income tax, or b) provide growth funds for the business.
The impact of this, however, is that most lenders consider ‘income’ as being the actual drawings from the business, so if your company has made a profit of £200k and you have only paid yourself £40k through salary and dividends lenders will consider your income to be £40k. This is where a lot of mortgage applications for self-employed directors fall down, because most of the high street lenders operate in this way and it takes specialist knowledge of the niche alternatives to find a suitable lender.
Dividends and mortgage applications
With mortgages and dividend income the tax liability is lower than standard earned income through a salary or taxed net profit, which in effect puts more cash in your pocket on a monthly basis. There are some lenders willing to lend more than usual, noting that the affordability will be greater. This is particularly important for those looking for the maximum company director mortgage loan they can get, as it can calculate the dividends in to show a higher affordability and get them a larger mortgage than they could obtain elsewhere.
Borrowing using profit retained in a limited company
Thankfully the specialists can consider mortgages for directors based on the company profit even if you have retained some income in the business, and using the above scenario these would consider income to be the full £200k.
The impact this has on maximum loan amounts can be huge, as per the illustration below:
|Lender||Income type considered||Income used||Max loan @ 5x income|
|Most high street lenders||Salary + Dividend||£40,000||£200,000|
|Self-employed specialists||Share of net profit||£200,000||£1,000,000|
Not only can this information be pertinent to large well-established and highly profitable business owners but also with mortgages for small business owners. In the early days of a limited company many owners want to reinvest any profits directly back into the business in order to grow it. Not knowing that directors of limited companies can get mortgages using retained net profits could mean that they end up choosing between one or the other unnecessarily when, in reality, they could have had the best of both worlds.
For further information on this topic you can click here.
All lenders require evidence of this income, and can ask for it in different forms. The main documentary evidence you’ll need is as follows:
|Definitely required:||Finalised accounts and/or SA302 from HMRC and/or OR Accountants reference|
|Usually required:||Latest 3 months business & personal bank statements|
To find out which accountancy qualifications are accepted by mortgage lenders read our article by clicking here.
It’s important to bear in mind that some lenders will only want accounts, an SA302 or a reference, others require both accounts and an SA302.
Company owners with adverse credit
Anyone with adverse credit will be restricted with the number of lenders they can go to depending on how severe and recent the issues are. More information can be found on our adverse credit page, but a summary of what adverse mortgages for business owners are generally possible specific to the self-employed is below. Bear in mind that the number of lenders may be restricted further if you have other niche lending requirements such as wanting to use your most recent years figure, or if you have only been trading for one year.
|0-12 months||1-2 years||2-3 years||3-4 years||4+ years|
|CCJ’s||Yes (If under £1000)||Yes (If under £2500)||Yes(Any value)||Yes(Any value)||Yes(Any value)|
|Defaults||Yes (If under £1500)||Yes(Any value)||Yes(Any value)||Yes(Any value)||Yes(Any value)|
|Debt MGMT||Yes (even if current)||Yes||Yes||Yes||Yes|
|IVA||Unlikely||Possible with 25% deposit||Possible with 20% deposit||Likely with 20% deposit||Likely with 20% deposit|
|Bankruptcy||Possible with 25% deposit||Possible with 25% deposit||Possible with 25% deposit||Yes with 10-15% deposit||Yes with 10% deposit|
Business losses in the last three years’
Getting a mortgage for a director of a limited company who has declared a loss in the last three years can be very difficult if he/she is wanting to go with one of the high street lenders. This is because it can indicate to them a lack of income reliability and, thus, increased risk.
If you have declared a loss in the most recent year then it is highly unlikely a lender will approve you, unless your salary is deducted before profits, in which case it may still be approved subject to a satisfactory explanation and underwriter approval. If the loss was two years ago and you have made a recovery since, you are more likely, and if the loss was three years ago with a three year trend of recovery there are several specialist lenders who’ll consider you.
Borrowers with large portfolios
It would make sense that experienced landlords and mortgage borrowers are treated more favourably by lenders when looking for new mortgages because of their track record, however this is not always the case. Those looking for a buy to let or a new main residential mortgage may even be held back by their assets with a lot of lenders. This could be due to affordability issues or because their current exposure to debt is high; or because the number of mortgages they have exceeds policy guidelines.
Those buying a main residence are often required to provide details of all their existing mortgages, and where properties are rented out, a full account of the portfolio. If mortgages are covered by rental income @ 125% (i.e. if mortgage is £1000 per month rent must be £1250) then most lenders will consider them self-financing and not penalise the borrower in terms of affordability. If some are not covered by rent the shortfall may impact affordability with most lenders, which can mean you are unable to borrow the amount you need. There are a small number of lenders who ignore any shortfall and in fact any properties in the background, so long as the new mortgage fits on standard affordability.
High debt size
Some lenders will cap the actual £ amount of borrowing you’re allowed to have in the background to qualify for a new mortgage with them. This cap changes lender to lender, some stipulate a maximum of £1 million, some £2million, and some don’t have any limit whatsoever. There are often additional restrictions regarding ‘in-group’ borrowing, for instance if you have £1 million of borrowing with Bank A they may not lend you more, but if the borrowing was with another lender Bank A would lend to you.
High number of mortgages
Lenders will also restrict the total number of individual mortgages a borrower can have. For example, if you have five already, they can be declined for a sixth. Some lenders cap the some specialise total number of mortgages for company owners at 10, some at 12, In the case of mortgages for experienced landlords and those with high levels of borrowing already, not placing a limitation on the number or £ amount of mortgages you hold provided they are all serviced and payments are made on time etc.
If you’re looking for information on getting a mortgage in the name of your limited company then please click here.
Borrowing using most recent years’ figures
Directors of a growing business making more income in the most recent year than previous, may struggle to get approved because lenders will usually average the last two or three years income. The example below outlines the difference in amount that lenders will lend based on this criteria.
|Year||2013||2014||2015||Income used if averaged||Income used if recent year|
|Max loan size @ 5x income||£116,665||£250,000|
Thankfully there are specialists who will consider mortgages for ltd company directors based on the most recent years’ income, so make an enquiry and we will pass it onto a specialist!
Remortgaging to raise capital – business and other purposes
If you have equity in your property and are looking to borrow money for your business (or to invest in another business or asset), it’s likely you’ve been declined as the majority of lenders only allow capital raising for consolidating debt, home improvements, or perhaps consumer goods such as a car or holiday – when it comes to business purposes there are only a handful of specialist lenders that will consider the application.
With these lenders you can get up to 85% loan to value as a maximum (subject to usual affordability etc), even if you have had adverse credit in the past.
Change of trading style
If you have recently changed trading styles (e.g. many sole traders go Ltd when they start earning larger sums) and you don’t have a full years trading under the new arrangement, then finding a mortgage can seem impossible. Almost all lenders will consider it a fresh business and as such require the standard one to three years’-worth of trading accounts from the new business to establish your income and affordability, even if you had been running the exact same business for 10 years under the previous trading style!
Thankfully not all lenders are the same and there are a select few who consider the previous business as evidence of income even though it will have ceased trading.
Get any questions answered…
Whatever your situation, if you’re self-employed or a director/shareholder of a limited company and need some advice from an expert please make an enquiry. We will refer you on to a broker that is approved by us and has specific experience in this area.
If you want to know if you can get a mortgage with late payments (or missed payments – arrears), then get in touch and an expert can review it all for you!