Mortgages for Company Directors

There are many reasons why Limited Company Directors are misunderstood by banks and mortgage brokers, most of the time there is a complete lack of knowledge. Salary, dividends and company profits are all just a blur of numbers. We are here to help.

The main reasons why company directors are turned down by banks are:

  • Not enough years of finalised accounts
  • The bank only assess the income as salary and dividend withdrawn from the Ltd Co

1 years accounts:

This is possible, but depends on several factors when considering the risk profile of the case:

  • The percentage borrowing or ‘LTV’ (Loan to Value %)
  • The multiple of income required
  • Whether there is a 2nd applicant to the mortgage that has income
  • The income levels prior to being self employed

For example, a client looking for a 75% mortgage and needing 4 x income may be considered a lower risk by some banks. If there is consistency in occupation and income levels between a prior business or PAYE employed job and the new business with 1 years accounts, then some lenders will consider this an acceptable risk. Having a 2nd applicant with income helps, as the mortgage is not then solely dependent on the ‘riskier’ self-employed income.

These aren’t set parameters, but you can see how someone in this circumstance is a lower, more acceptable risk than someone who wants a 95% mortgage, 5 x income in sole name and has a lot of unsecured credit card debt.

Salary & Dividend vs Company Profits

It’s all very well a bank lending ‘5 x income’, but the income figure you start with is crucial. Most banks will lend based off of the combined figures of salary and dividend, which may not be enough. Salary + Dividend alone may not be a true reflection of the income you could have drawn in income, particularly if you are a majority shareholder.

We understand that for many reasons dividend drawings may be far lower than the company profits. We have access to lenders that will assess your income from your proportion of the Ltd Co profits + Salary instead.

It’s about understanding the risk profile of a case and presenting it accurately to the right lender.

Case Study 1. One years self-employed accounts.

James had set up a recruitment company and had just prepared his first years Ltd Co accounts. His salary and dividend drawings were low at £15,000 but the company net profit was quite healthy at £40,000. He and his girlfriend wanted to make their first purchase, a mortgage of £262,500 on a £350,000 purchase (75% borrowing). James’ girlfriend Anna earned £25k per annum PAYE employed.

James could also demonstrate he had earned £35,000 as a PAYE employed recruitment consultant with his previous employer in the tax year prior to starting his new business.

As there was consistency in earnings and occupation between the previous PAYE job and the new business, we were able to convince a high street lender to agree the mortgage on standard terms. The interest rate available was a normal rate from their standard range.

Case study 2. Mortgage based on Company Profits

Alex and Louise owned their own construction company, which had done very well in recent years with turnover and profits steadily increasing. Their accountant had advised them to only draw in salary and dividend what they needed to live on, and retain any other profits in their Ltd Co to withdraw at a later date, potentially at a lower tax rate. Salary + dividend average over 2 years was £100k but salary + company net profit was £225k average.

They had a flat with a residential mortgage that they wanted to keep and rent out as a long term investment, the flat was not currently rented, but based on the local rental market would easily be self-financing once rented.

They had also retained their previous flat and had maintained a residential mortgage on that property too, so there were 2 flats with 2 residential mortgages that we needed ignored by the new lender.

Alex and Louise wanted to purchase at £1.5m and obtain a 70% mortgage of £1.05m. They approached a bank they had sourced on a ‘best buy’ table via the internet, they would only take the £100k salary + dividend and would offer them a mortgage of £500k maximum. This is when Alex & Louise contacted us.

We gathered all their details and presented it to the ‘large loan’ team of a high street bank. They could see that as joint 100% shareholders in their business that they had complete control of the company and agreed that although they only drew out £100k they could have taken far more. The bank were happy to take the £225k as the ‘income’ figure and as the loan desired was within 5 x ‘income’ the full loan of £1.05m was available.

This lender ignored the existing rented property as we could demonstrate from rental agreements and bank statements that the property was self-financing. In addition they also ignored the current mortgage as we could prove that the rental income (once rented out) would make this property self-financing also. We gathered local letting agent rental assessment letters as evidence and the bank were happy with this. There was no need to swap the current mortgages onto more expensive Buy to Let mortgages.

Even though the loan was over £1m and used company profits the rate was a standard deal and there was a flat £2k arrangement fee added to the loan by the lender.

Our skill is understanding the risk and matching it with a suitable lender.
It’s about understanding the risk profile of a case and presenting it accurately to the right lender.