Company Director Mortgage
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Income is the main factor in mortgage approval. How much you can borrow will depend on what income can be used as a stable income by lenders. Most lenders have strict criteria for income assessment for self-employed people, unlike employed applicants.
For self-employed applicants mortgage lenders want to know how is business is performing in the present and in future. To find out this information, lenders will ask for business accounts, company accounts and tax returns or SA302 and Tax overview. Mortgages for company directors can be complex, and working with expert mortgage brokers can make things a lot easier.
We will look at how lenders assess your income as a company director and the documents you will need to prove your income as a company director for mortgages.
What Is a Company Director Mortgage
Let’s be clear that a company director mortgage is not a special type of mortgage. It is a normal mortgage like any other type of mortgage, but the term is widely used for company director mortgages due to the complex income involved. Every lender has different requirements to be met as a company director.
Company Director Income Types Lenders Can Use for Affordability
As a company director, income taken as remuneration can be a salary and a dividend, which is flexible as the company director wants to keep this most tax-efficient way. Mortgage lenders have different ways of assessing this income for affordability, and understanding this can help to secure maximum lending while increasing chances of approval.
Types of income for company directors :
Salary: All of the company directors pay themselves an annual salary. Most of the lenders will take this as an income source for mortgage affordability. But many company directors take very little or a basic salary to save on taxes.
Dividend: As a company director, they can take a dividend income from the company. Most of the mortgage lenders will use this source of income for affordability, but they will take the last 2 years average rather than the latest years dividend income.
Net Profit: This type of income is after taking all the expenses minus gross profit.Net profit can be used by some of the specialist lenders rather than just using salary and is divided. This can boost the lending amount significantly.
Net profit after corporation tax is paid is used by most lenders.
Net profit before corporation tax being paid can be used by some lenders too.
Retained Profit: Retained profits are a portion of profits not being used by company directors as dividends instead, the profit is retained in the company’s accounts. Retained profit is usually kept as a business backup or for expansion. Retained profit is seen as a sign of a healthy business. Some specialist lenders do consider retained profit for income assessment, resulting in higher lending.
How Lenders Calculate Income For a Company Director Mortgage
Most mortgage lenders would ask for 2 years of trading history and accounts for the company director mortgage. This helps lenders to get an overview of how the business is doing. The following income is considered by lenders for income assessment.
Salary and dividend: Used as a 2-year average from most lenders, some lenders use from the latest tax years, which increases lending. For example, an applicant with a salary of £12000 and dividends of £30000 makes a total of £42000 x 4.5 times of income =£189000 total lending.
Salary and net profit: This combination of income is used by some lenders. Here, net profit is used rather than dividing income, which can boost borrowing. For example, an applicant with a salary of £12000 and a net profit of £40000 will make a total of £52000 x 4.5 times income = £234000 total lending.
What Income Documents Do I Need For a Company Director Mortgage
Income documents for company directors are similar to those of employed applicants.
The documents can include :
- Proof of ID, like a passport or a driving license
- Proof of address, like a utility bill or a bank statement for the last 3 months.
- Proof of income, which can be SA302 and Tax Overview for 2 years.
- Some lenders even ask for an accountant’s certificate and company accounts.
- Personal bank statements for 3 months.
- Business bank statement for 3 months to required.
- Deposit proof if purchasing, which can be savings bank statements or a gift letter if using a gifted deposit.
Final thoughts
As a company director, looking to secure a better mortgage as a First Time Buyer Mortgages Rates or remortgage can be difficult. Lenders will have a different requirement for company directors than employees or clients.
Understanding the income and affordability used by lenders will improve the chances of approval for a company director’s mortgage. Working with mortgage experts can help to get the documents right in the first place.
Get in touch with MariannaFS to get started and secure a company director’s mortgage.
FAQS
Do I need a mortgage broker for company directors mortgages?
Mortgage brokers can be very helpful while applying for a mortgage as a company director. Their expertise and guidance can improve the chances of mortgage approval for company directors as they know which lenders to approach with the correct documents.
Do I need a specialist mortgage lender company director mortgage?
This will depend on the applicant’s personal situation, if they have an adverse credit history, just one year of trading history or if they want to use a combination of income. Specialist lenders have a better approach to these kinds of applications.
How many years of trading accounts do I need as a company director?
A minimum of 12 months of trading history is needed when applying for a mortgage for company directors. Having a 2-year trading history can be very helpful as it can open doors to more lenders.
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