Mortgages for Limited Company Directors
As you'd expect, many company directors come to us seeking help to get a mortgage. They're often unsure how much they can borrow, how many years of accounts they'll need, or even if they can get a mortgage at all.
This in-depth guide to company director mortgages aims to answer those questions and many more.
How many years of company accounts will I need?
Most high street lenders require a minimum of two years, finalised accounts, submitted to HMRC, though some require three.
From the mortgage provider's point of view, several years of trading history help to demonstrate your business is a viable concern.
Fortunately, there are a few mortgage providers happy to lend with just one year's limited company accounts. However, to mitigate the risk to the lender, you may need a higher deposit of at least 10 per cent. With two or more years of trading history and books, a far wider range of deals, rates, and lenders become available, including most of the mainstream mortgage providers.
What size deposit will I need?
It's still entirely possible to get a mortgage with a 5% deposit. A 95% loan-to-value (LTV) deal with one year's submitted accounts may be possible, but the majority of lenders will only go to 85%-90% LTV.
Some providers also work on a tiered LTV basis, whereby the max loan-to-value decreases as the mortgage amount increases above a certain threshold.
For a self-employed remortgage, most lenders allow a maximum loan to value of 90 percent. For SPV mortgages to purchase a BTL property, 75 percent is fairly standard.
Deposit requirements for leasehold properties
Another factor that can affect the maximum LTV, is the type of property you are buying.
You'll usually need to find a larger deposit to buy a flat or maisonette. Compared to house purchases, lenders consider leasehold properties a weaker form of security against the loan. How much deposit you'll need depends on the loan company, but 15-20% is quite common.
You'll find the best mortgage rates and deals are reserved for borrowers with larger deposits of 25-40 percent, but there are still excellent rates available at higher LTV.
How much can I borrow as a company director?
Assuming you have a large enough shareholding in the company to be classed as a self-employed director, not an employee, around 4.5 times either single or joint income.
Many mortgage providers will use your salary (sometimes referred to as director's emoluments) and dividends to calculate your income and maximum borrowing figure.
Others will use salary and net profit, whilst others will consider either option.
Let's take Pete as an example. Pete is a director and 100% shareholder (a.k.a participator) in a bakery business in Wrexham. He pays himself an annual salary of £12500 and draws £37500 p.a. in dividends. Giving himself an annual income of £50000. Potentially he could borrow around £225,000 as a sole borrower.
If Pete was making a joint application and his partner earned £45000, their combined income of £95000 would give a maximum borrowing figure of £427,500 on a 4.5 x income multiple, subject to an affordability assessment and credit check.
Borrowing more if you're a high earner
Banks and building societies are often willing to use larger income multiples for high-earning company directors. Some lenders will permit 4.75 or 5 times income, whilst a few others will go to 5.5 or even 6 times earnings. Others use the same multiplier for all self-employed applicants, regardless of income.
Each provider has its own definition of what constitutes a high earner, but £75000 or more per annum in salary and dividends is a good benchmark.
Always weigh up carefully if borrowing more based on a higher multiple of earnings is prudent.
How is affordability assessed?
All maximum borrowing figures are subject to affordability assessments by the lender's underwriters.
Credit score, ongoing credit commitments, financial dependents, and other committed expenditures like child maintenance and spousal support, are all assessed to determine how much you can afford to borrow.
The Financial Conduct Authority requires all mortgage providers to carry out a 'stress test' of the borrower's ability to service the monthly mortgage payment at a much higher interest rate.
So as you can see, there are many factors lenders have to consider in determining how much
Can I get a Director mortgage with poor credit?
Yes, you can get a director mortgage if you have poor credit. However, it will make getting a mortgage trickier, and probably more expensive, particularly for severe credit events like an IVA, repossession, or ex-bankruptcy.
Lenders make decisions based on how severe and how recent the bad credit event(s) are.
Some lenders only accept mild adverse. One or two missed credit card payments, or a low-value default or CCJ in the past 2 years, for example.
Others are more flexible and tolerant of severe bad credit, and will even consider mortgage applications from people a few years after being discharged from bankruptcy or settling an IVA.
Keep in mind that, to mitigate the higher perceived risk, mortgage rates tend to be higher for the most severe forms of bad credit, and sometimes even with moderate adverse credit.
Can I borrow using my limited company's net profits?
Yes, borrowing using your share of company net profits is possible with many lenders.
Leaving cash in the business to fund future growth, or to minimise personal tax bills, is often a good idea. But it can have the unfortunate side effect of reducing what you can borrow from lenders who only work with salary and dividends.
Fortunately, some mortgage companies will use your salary and share of any net profit. Potentially allowing you to borrow a lot more.
Using net profit isn't always the best choice though. Our director's mortgage guide to net profit vs dividends explains the pros and cons of each option.
As a company director, am I considered self-employed?
Yes, provided you meet the lender's minimum shareholding percentage. Some mortgage providers require a director to own at least 20% of the company share capital, others 25%.
If you own less than the lender's minimum shareholding, your application will be assessed for affordability as though you were an employee.
Can I borrow based on my most recent year's accounts?
Yes, a few mortgage companies are happy to assess income using your latest year's accounts, and not just an average of the past two. This can be particularly beneficial if you need to borrow more.
For example, Megan has declared a salary and dividends of £65,000 in her latest year, but only £30000 in the previous year. Giving her an average of £47,500 over two years.
Using just her latest years' books would allow Megan to potentially borrow £292,500 versus just £213,750 with the two-year average.
As part of their affordability checks, mortgage firms will want to see evidence the increase in profit is sustainable growth, and not just a one-off exceptional event.
What documentation and evidence of earnings will I need to provide?
To evidence your income and trading history, most lenders typically require most or all of the following documentation:
Company accounts for the past 2 years (if trading that long)
SA302 Tax Calculations and Tax Year Overview docs for the past 2 years
3 months business bank accounts.
For a detailed guide to all the documents you'll need, check out our self-employed mortgage documentation checklist.
Mortgage advice for limited company directors
Applying for a mortgage as a company director needn't be difficult.
A good advisor can explain the nuances of the mortgage market for company directors, save you time, and increase your chances of finding the best deal for your circumstances. If you need advice, or are ready for a quote, please call 07904 158233 or email hello@saltwoodfinance.co.uk.