Company Director Mortgages

How does the mortgage process work for a limited company director?

Fundamentally, the mortgage process is always the same. It’s always going to be a combination of assessing income, affordability and outgoings. The pricing of the mortgage you’ll be offered will be dependent upon your personal situation and the deposit you put down.

As a company director it’s more around the assessment of your income, because there’s a number of different ways to do it. We’ll expand on this as we go, but in short, when you run a limited company, banks will either look at your salary, your net profits, your dividends, or a combination of those things.

That criteria point is so important here, because if you’ve got very good profits, but haven’t drawn many dividends, one lender might not lend you as much as another.
It’s also crucial to touch on what’s defined as a company director in terms of the assessment. A company director owning 5% of the business will be treated as an employee. If you have over 25% shareholding or 25% plus, you’re considered a person of influence and you will be treated as if you’re self-employed.

A lot of people get confused by this, because the tax position is completely different. You might be a 100% shareholder of your business and purely draw a salary. You assume you’re an employee and technically, you are from a tax perspective, but not from a lending perspective.

There’s also a hybrid situation. Contractors often sit in this space, if they work on a fixed term contract, for three, six or 12 months. You may run that through a limited company. You could either be treated as a limited company director or as a contractor. We’d just find out what’s the most favourable assessment.

So in terms of the process, the criteria will drive it – that will have such a big impact on the lenders we go to.

Are there any specific mortgage products designed for limited company directors?

Yes, there are some very specific products. Some non-mainstream lenders offer that and have really good criteria. However, the majority of high street banks will have criteria for limited company directors. As I mentioned before, the assessment is different.

Most banks have criteria, but it differs. If you go to Halifax, they look at things differently from Santander, and so on. It really varies.

One thing I never quite understood is that a lot of high street banks cap the amount they will lend you to 4.49 times your income. It’s such a specific figure. Some banks do that, some banks don’t.

So while the products are the same, the criteria varies. We touched on contractors already – and you might think it’s simpler to get a mortgage as a limited company. But I’d suggest we stay on the contractor path because that’s a bit easier and, to be blunt, the products can be better.

Do many lenders offer mortgages to limited company directors?

All banks will offer a mortgage, it just depends how useful it is to you. If one bank is looking at taking salary and dividends, and you haven’t drawn any, but have a large net profit, that’s not going to help. It can limit your income available for assessment.

Where this particularly works for contractors is that if you’re running everything through a limited company, you probably want to push your tax liability down, i.e. offset a lot of costs. Your net profit might be quite small, but your contract value is relatively high. That’s why the contractor path might work better than the traditional limited company.

What are the eligibility criteria for obtaining a mortgage as a limited company director?

The absolute minimum level of trading is one year – you need one set of accounts. There isn’t a lender in the land that will do anything with less than a year’s trading.

Contractors are different. Depending on your level of experience, we can get you a mortgage from day one. If you’ve literally gone from an employed role to taking a contract, even if it’s through a company, we can do that – it’s a lot more flexible.

One year of trading time is the minimum, and two years opens up most of the market. Once you’ve been trading three years or more, then you’ve got the whole market to go for.

Beyond that, it’s each lender’s criteria as normal. For example, if you’ve been trading three years and you’ve got nice healthy profits, you can get a 100% mortgage – that would fit the lender’s criteria.

People are surprised to learn that we have 100% mortgages available these days. Ideally, you put down a 5% deposit or more and as always, the larger the deposit you put down, the more options you have and the lower rates.

Another caveat – it depends on the property you’re buying. Even if you qualify on the limited company route, if you’re buying a new build apartment, you may need a slightly larger deposit. It’s just something to bear in mind.

Outside of that, it’s the usual affordability rules. I mentioned that some lenders cap borrowing. Things like that really drive lender choice. The usual credit profile rules apply as well. So if you’ve had credit blips in the past, it’s not a showstopper at all. Some lenders are amenable to that.

We can always go to specialist providers, but you would be surprised how many mainstream high street banks will overlook a few credit blips, certainly if they’re more than two years ago. If they are in the last two years, but they’re nothing major, like the odd missed payment, that may also work.

What documents are typically required when applying for a mortgage as a limited company director?

This is probably the most crucial point to take away from today. I’ve already mentioned the criteria – and that is driven by the assessment of the documents.
Depending on how you run your business, it might be more favourable to look at your limited company accounts, or better to look at your SA302. We could also get an accountant’s certificate.

As I’ve already mentioned with contracts, we could just work on the contract value itself. Those documents do differ in how different banks assess them, and how your income is looked at.

It all goes back to that difference between salary, dividends and net profit. They are captured slightly differently on the documents. It’s nothing untoward, but we try to marry you with the right lender because that assessment is absolutely key and it drives the criteria.

We also need to look at the usual bank statements, proof of deposit and ID. Some banks might want to see business bank accounts. It’s just to check that the monthly turnover is in line with your annual turnover, and that you’re still trading.
This is a legacy from Covid, where there are some ‘ghost companies’ around. That’s probably the only difference. Otherwise it’s pretty much the same process.

How do lenders assess the income of limited company directors for mortgage purposes?

As much as the assessment is important, it drives how much you can borrow.
If you’re a contractor, it’s nice and easy. The income calculation is typically your day rate, multiplied by the days worked, over a 46 week year. You’ll probably find that’s way in excess of your net profit.

The most usual assessment banks offer is on salary and dividends. Dividends are normally averaged over the last two years, unless there’s a big variance. For example, if your most recent year is lower than your previous year, banks use the lower figure.
Or, if there’s a huge spike in the current year versus last year, they use an average – or they might even take a bit more off that. Some look at three, but the vast majority of banks take the last two years.

Net profit I’ve touched on a few times, and we see a lot more of this now. There’s been a legacy issue where people are almost penalised for running their business well. You might have had a very healthy net profit over the last two or three years, taking a nominal salary and dividends to keep your tax liabilities down. Previously, you couldn’t use that net profit to get a mortgage.

If you have run your business very prudently, the net profit assessment is probably better. Within your accounts, there’s something called your ‘net profit on ordinary activities before tax’. That’s a far better reflection of the true profitability of a business. A couple of banks use that assessment and it can be very useful, particularly if you’re running a number of companies.

As a warning, if the business has made a loss in the last two years, that can be a showstopper for many lenders – even a loss of just £1. It can get really difficult for company directors.

There could be completely legitimate reasons as to why you may have made a loss that year. You may have very healthy retained profits and you’re drawing the income you’ve always drawn. It’s not a problem to you, but it’s a big problem to the banks. That’s something that needs a lot of explanation and where we might need to get a bit more specialist.

We have got this through with mainstream lenders, if there’s a good reason like business acquisition or capital expenditure, but we do need to really get into the nitty gritty of why there’s been a loss.

How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?

I touched on that in my last answer. It’s one that some banks do look at, but it’s a bit of a perversity that banks aren’t overly keen on retained profits being drawn through unless there’s a reason.

Dividends are great. And in fact, this is where actually being a limited company director is actually more favourable – because some banks will gross up your dividends because you’re paying less tax. That’s particularly true if you’re earning above £100,000 or £150,000.

You’re paying almost half the tax as someone under a PAYE scheme and banks are attuned to that. Higher rate taxpayers can borrow more than someone under PAYE – so there is one upside of all this hassle!

Can I still get a mortgage if I have a limited trading history as a company director?

Yes. That one-year minimum trading period is a showstopper, unless you are a contractor.

It also depends on what you mean by limited. Some people think three or five years is limited. Just be really clear, if it’s under a year, it’s not going to work. But if it’s over a year, you do have options. Two years plus is ideal.

Are there any advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?

This is a conversation to have with your accountant. I’m always mindful that while we can get you a mortgage, the tax position can be more important than the mortgage itself.
If you’re a sole trader, it’s simple. You get your net profit, and that’s what banks work on. For limited companies it’s a lot more complex, but there are upsides and downsides.
Just talk to your accountant first, get that sorted from a tax position, and then we can work backwards and find the right lender. We certainly can’t give you any tax advice, it’s just not our remit.

Are there any restrictions on the types of properties that can be purchased with a mortgage as a limited company director?

No. It’s an interesting point. actually. People think that as a limited company director, banks might load the interest rate – but they don’t, as I said before – or they’re going to restrict them on the property. They can’t. Banks just have criteria and you just need to tick the right boxes.

Let’s say you want to buy a listed property or a non-standard build, or an eco house where you need to mow the roof. We’d need to find a bank that’s comfortable with that property.

It might be that you still go with a high street lender. It’s only really if you go really off-piste on the property that you’d need something more specialist.

I always talk about the ‘three C’s of lending’ – capacity, collateral and commitment. They’re the three things we’re trying to balance. Imagine it like a Venn diagram, where the further you pull those circles apart, that choice of lenders in the middle just gets smaller.

Any final thoughts before we return with part two?

The point to take away is that this is a complex area. I’ve skimmed over a lot of things in an attempt to keep this simple – but it’s just not.

So speak to a broker as soon as you can. We have direct access to underwriters and some phenomenal research tools that make life so much easier. Just give us all the information and let us do the hard work.

If you run your own business, that’s brutally hard. I’ve done it myself for 10 years. People say raising children is hard, but it’s a walk in the park compared to running a business.
You’ve got a lot of things to worry about. Come to us. We’ll make your life easier and save you a lot of time. On top of that, brokers invariably have exclusive rates and access to lenders you simply wouldn’t get.

We’re quite confident we can get you the right outcome. Aside from that, the whole thing is about saving you a lot of time and headaches, which is very valuable in itself.
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