Limited company directors often have the impression that they’re the outcasts of the lending world and it’s really hard to get mortgages. But there are quite a few lenders, even high street banks, that cater for limited company directors. Not only that, some will even give them more favourable lending.
Certain lenders let you leverage slightly more on income you may not have necessarily taken out of the company – such as net profits or retained profits.
It all depends on how your income is taken from the business. For example, if you’re a contractor and you run a limited company, we could potentially use the contracting day rate figure as opposed to the salary you pay yourself.
That’s normally the maximum figure you receive, and lenders will assume that you earn that rate for 46 or 48 weeks of the year.
If you’re a ‘normal’ limited company director there are multiple options. You could use salary and dividends or salary and net profits before tax. You could also use salary and net profits after tax. These metrics will depend on how you receive your income, what works best for you and which lenders are more suitable.
Yes, dividends count as income. The key thing to look out for, though, is if you are drawing dividends from previous year’s earnings and there’s a decline in your profit. If your dividends are more than your profit it becomes very hard to prove to the lender that your level of dividends is sustainable going forward.
It’s key for us as advisers to understand the bigger picture of why that is. It could be, for example, that your business is going through a growth phase and you made a big investment into the company that reduced your profit – but you still had dividends to draw. We can easily prove that.
But if your business is on a declining trend and your profit and turnover is reducing, we have to take a step back and understand the bigger picture and why that’s happening.
It normally starts with tax advice and how your accountant has been advising you to draw money out of the business. But generally fluctuating income isn’t normally an issue.
Lenders will usually take an average of the last two years unless the latest year has seen a reduction in performance, in which case most (but not all) will just use that latest year. A small handful of lenders will only use the latest year. So if you’ve had a really big income for the past year there’s a few lenders that will disregard all previous years in working out your maximum lending and affordability.
PAYE income can also be used and is added to other funds you draw from the business – your dividends. If we choose to use the net profit then that PAYE figure would be then added to the net profit figure. Again, it comes back to how the limited company director’s income is structured or profits in the business. That will inform the advice we give on the figures to use to prove affordability.
This is one of the trickier ones to get by lenders because retained profit is essentially profit that sits in your business from previous years. To use this we need to prove liquidity in the business – that the business can operate without that retained profit.
Only a handful of lenders and private banks will accept this, and will add it to the PAYE figure to show overall income. For example, your PAYE may be £50,000 and your net profit in the business may be £200,000, but your dividend is only £50,000. There are lenders that will accept the net profit figure and use retained profits from previous years as well.
The metrics do not change, whether you’re limited company or PAYE salaried. Some lenders offer 95% mortgages, but for property worth over half a million most lenders limit borrowing to 90% Loan to Value – so you will need a minimum 10% deposit.
The amount you can borrow, as a guide, is between 4.5 times and 5.5 times your income, whether that be PAYE plus net profit, or PAYE plus dividend.
The key thing for us as advisers is to try and get introduced to your accountant as early as possible. That way we can make sure that your tax position is not jeopardised and you’re not making unnecessary withdrawals through PAYE or dividends just to try and satisfy mortgage lenders.
We’ve had a lot of clients that have come to us too late and paid huge amounts of tax drawing money that they didn’t need, because they’d been given the wrong advice. So get in front of an adviser as early as possible and get your two professional advisers talking – accountants and mortgage advisers – to protect your overall financial position.
Your home may be repossessed if you do not keep up repayments on your mortgage.