Limited Company Director Mortgage
Limited Company Director Mortgages – A helpful guide
As a Limited Company Director, much like other Self-Employed individuals, you will have many of the same mortgage options as more conventionally employed applicants. At the end of 2019, 15.3% of the UK population were classed as Self-Employed and the onset of Coronavirus has pushed even more people to reconsider their employment options.
As the nation’s workforce changes, mortgage providers have had to change to accommodate more Self-Employed workers. There are even specialist lenders who deal solely in mortgages for the Self-Employed. The major difference for Self-Employed applicants lies in the application process, both with how lenders calculate your mortgage and the way that you prove your income.
Documenting your trading history
Although lenders’ requirements differ with regard to application requirements, all of them will want to see well-documented records of your business operations. The majority of lenders will expect you to have at least two years of trading history before they will consider a mortgage application.
Lenders who specialise in Self-Employed mortgage applicants may be willing to consider those with as little as one year’s trading history, but this will dramatically reduce your choice of lenders. To benefit from a wider range of lenders and more competitive interest rate, it’s worth waiting an additional year before applying for a mortgage.
How do I prove my income?
As a Limited Company Director, mortgage lenders will consider your individual salary and dividends from the business. They may also look at the business profits as a whole to ensure that your company can continue to support your salary.
In order to prove your income, you will therefore need to provide:
- Full accounts for the past three years, signed off by a qualified accountant
- Your SA302 forms for the past three years
- A tax overview from HMRC for the past year (to prove payment of tax)
- Bank statements from your business account (to ensure the business can support your salary)
What about PAYE income?
Your salary will be taken into consideration, however, payslips are not a suitable form of evidence to support this and the documents listed above will be used to determine your salary. If you’re receiving a PAYE salary from your own business, you’re still classed as Self-Employed for the purposes of the mortgage application.
Your dividends payments will be taken into consideration when calculating the mortgage loan amount, however, the amount must not exceed the net profits of the business.
Whilst it is common and in most cases advisable practice to retain profits in the business, unfortunately, retained profits cannot be considered in the mortgage calculation. As retained profits reflect the income from previous years, lenders will not consider it as a current business performance measure.
If you’re planning to take a mortgage in the next few years, you may wish to consider drawing down more profits from your company in the few years prior to your application. This will increase your overall income for mortgage calculation purposes.
What if I have a fluctuating income?
Most Self-Employed workers have at least some degree of fluctuation in their income. Where this is the case, lenders will take an average figure from your last two or three SA302s. They will, however, usually look for an upward trend over at least the last two years of trading.
Where your income is decreasing each year, the lender will only take your most recent year’s income into consideration, which means that your loan figure is likely to be lower.
Ordinarily, there are no additional deposit requirements on Self-Employed applicants and a standard 10% deposit is required. Given that lenders are more cautious in current times, as a result of the effect Coronavirus has had on the property market, they are asking for Self-Employed applicants to increase their deposit amount slightly.
As a Self-Employed applicant, offering a larger deposit at any time, can improve your chance of acceptance, as it reduces the risk to the lender and instills trust in your affordability. This is particularly applicable if you have a history of adverse credit.
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