Limited Company Director Mortgage
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Limited Company Director Mortgage
Joanne Markham tells us about limited company director mortgages.
Podcast approved by The Openwork Partnership on 25/6/2024.
How does the mortgage process work for a limited company director?
It works virtually the same as if you were employed. It’s the same application process. The only difference is just the way lenders view your income, which we’ll come to shortly.
Are there any specific mortgage products designed for limited company directors?
There are on the Buy to Let side – the investment side – but not on the residential side.
Are there any specific lenders that specialise in mortgages for limited company directors?
Yes and no – it all comes down to lenders’ criteria. How you take your income from your company might influence which lender we go to – again we’ll cover that in more detail shortly.
What are the eligibility criteria for obtaining a mortgage as a limited company director?
As a rule you need to have been trading for two years. Lenders want to see two years’ history of accounts.
A lot of people are 100% directors of their own limited company. You might have gone from a sole trader to a limited company. If you have some history as a sole trader and a year as a limited company, that will often be acceptable. The criteria from lenders can vary.
Some lenders will accept you as long as you have gone limited for tax reasons or another clear reason. It helps if your business earnings are at the same level or have increased.
We have done a podcast on one-year self-employed mortgages so there are potentially other options if you’ve been trading for less than two years.
What documents are required when applying for a limited company director mortgage?
If you were employed, you would need three months’ payslips. When you’re self-employed they look at your income on an annual basis. They will be looking at your last two years’ income via your accounts and tax calculations, along with bank statements.
Depending on your business and the lender, they may ask for personal and business bank statements. If it’s a young business they might see that you’re putting an income through of say £40,000 and your business bank statements will show regular money going through.
Ideally in the last three months you will have traded the same as, or perhaps a bit more than your previous annual income. Lenders are checking it’s sustainable, more than anything.
We have many different lenders that all view it slightly differently, so it’s down to a broker looking at each individual client to see what business is like and how long they’ve been trading.
When should I talk to an adviser about a limited company director mortgage?
If you’re thinking about buying your first house or you need to remortgage this year, pick up the phone to a broker. Just have a chat first. Maybe you’re thinking about getting a mortgage in three or six months’ time – we’ll look at your individual circumstances and tailor a mortgage around you.
We’ll explain what you’re going to need and what lenders want to see, so you’re prepared. If you’re coming to the end of a mortgage deal and you’re looking to remortgage, don’t leave it too late. You could end up on the standard variable rate.
Look at it three to six months prior to when the deal is up. Similarly, if you’re a first time buyer, talk to a broker as soon as possible so you’re prepared and you know what you’re going to need for that application.
How do lenders assess the income of limited company directors for mortgage purposes?
They look at it in two ways. When you’re a limited company director, as a rule you’ll be employed by that company, so you’ll have a monthly pay slip.
You’ll also earn dividends. Most lenders will look at your PAYE plus dividend income. Very few will look at the last year’s income alone – they look at an average of the last two years. If the latest year is lower than the previous year, lenders usually take the lower year.
However, we do also have lenders that will lend based on your net profit after corporation tax. A lot of people are the only employee of their limited company and take most of the income out of the business account, while others have a lot of money going through the business and leave a net profit sitting there. They don’t take it out because they’re taxed on it – so some lenders will use that net profit as income.
So if you’re looking at buying a bigger property and you’re not officially earning enough out of the business, this is an alternative approach.
Can someone still get a mortgage if they have a limited trading history as a company director?
Again, have a listen to our podcast on self-employed mortgages with one-year trading. Whether you’re a sole trader or a limited company director, if you’ve just got one year’s trading they might want to look at your previous history in your role. It’s all on that podcast.
But essentially if you’ve got one years’ accounts you can get a mortgage. If you don’t have a year’s worth of books yet, you can’t.
Are there any advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?
No, there aren’t. As a sole trader you don’t have dividends, you just have the income. But it’s worked out exactly the same – lenders take the last two years and average them. Very rarely, they will take the latest year. There’s got to be reasons behind it.
Perhaps your income has jumped up quite a lot from the previous year to this one. They’re looking for a steady increase. There aren’t really advantages or disadvantages, it all comes down to the way you’re employed and what kind of business you’re running.
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Are there any restrictions on the types of properties that can be purchased with a limited company director mortgage?
No, there isn’t specifically a limited company director mortgage product. It’s just a standard mortgage. Whether you are employed, a sole trader or have a limited company, they look at your earnings exactly the same way.
It’s the same for someone who’s employed and a limited company director. They get the same mortgage and the same mortgage rate.
Can someone use their limited company’s profits or assets to support their mortgage application?
No, you can’t use company assets towards your borrowing, but you can use the net profit within your business. Lenders would look at your full sets of accounts, so make sure you’ve got an accountant to get this done for you.
We could look at the net profit after corporation tax – but not every lender will accept that. Only a few lenders take this approach. A broker will look at how you run your business and where your income is going to be coming from and what you’re looking to borrow.
We look at the type of house you’re buying, or you own, and what deposit or equity you’ve got to see which lenders will be suited to your situation.
Are there any tax implications or considerations for limited company directors?
No, it’s all done on earnings. The good thing with using net profit is that it’s still retained within the company after corporation tax – whereas if you were to take it out and take it as earnings, that would be taxed.
Rather than use a broker, you might go to your local bank who could be, let’s say, Santander. Santander will not allow you to use net profit after corporation tax. If you wanted to borrow £150,000 but your earnings aren’t enough, you could end up drawing more earnings from your company.
But if you speak to a broker, we can use a lender that will use net profit after corporation tax and you won’t have to physically take money out and pay tax on those earnings. You can keep it in the company.
How can I improve my chances of getting approved for a limited company director mortgage?
Be prepared – we’ve got an idea of what they’re going to ask us for and what to gather for compliance and our own due diligence. We always make sure that we’re giving you the most appropriate advice, and that means gathering a lot of paperwork.
Not all of it goes to the lender. They don’t necessarily want to see it all – they know what we’ve gone through to get you this point. But they may ask for three months’ business bank statements and an accountant’s certificate to make sure you’re running your business as well as you can.
If everything matches up, it should go through quite smoothly. But if, for example, you say you’re earning a lot of money but there’s no money being paid into your bank and you don’t have a good explanation, that’s where you could find things more challenging.
What is the typical interest rate and repayment term for a limited company director mortgage?
It completely depends on your situation. If you’re 50, you’re going to have a more limited term than if you’re 25. Interest rates are same as for everybody else.
I don’t want to give you a rate today, because by the end of today it will probably be out of date! But every lender has slightly different rates and criteria.
But sometimes criteria can have an effect – things like having to use net profit instead of salary and dividends can make a difference as to which lender we use.
It’s very variable, but as far as interest rates and repayment terms go, lenders treat everybody the same. So it’s all dependent on your individual circumstances.
Can I use a limited company director mortgage to purchase a Buy to Let property?
You can use a limited company to put a Buy to Let mortgage, but it needs to be a specific type of property company. If you’re a builder, or a mortgage adviser, or a self-employed hairdresser with your own limited company, you can’t do it through that business. It’s got to be a ‘special purpose vehicle’ or SPV.
Every limited company has a SIC code which relates to the purpose of the company. To buy a property you need a particular SIC code for land and rental property.
How does being a guarantor for another person’s mortgage affect my own eligibility as a limited company director?
It will be taken into account as part of affordability. So if you’ve been a guarantor for somebody else’s mortgage, that will go on your credit file. When you’re looking for a mortgage that will come up and be taken into account.
Lenders have to make sure that if the person you’re guarantor for can’t pay, you have affordability within your income to step in. So be very careful about guaranteeing people’s mortgages.
Parents sometimes do that for children, which is fine if they no longer have a mortgage. But when you’re younger and you may want to purchase a house or get a loan, that will get taken into account – you’re the backup plan if something goes wrong.
Can I remortgage a property as a limited company director? What are the potential benefits?
There are no benefits – you get treated the same as someone who is employed. It’s just that you’re using the earnings from that limited company to fund the mortgage and make sure the affordability is there.
It’s not a limited company mortgage, it’s your own personal mortgage – the only difference is how your earnings are used to calculate the affordability.
What happens to the limited company if someone’s unable to make mortgage payments on time?
Nothing – even though it could be 100% your limited company, it’s your employer. It’s exactly the same as if you were working for a supermarket – it’s on you. If you don’t make the payments, potentially your house will be repossessed.
That’s the last thing banks will ever want to do, but if you can’t make the mortgage payments your limited company will be fine. It’s your house that’s affected. The mortgage is secured on that property. If you can’t make the payments, they’ll take the property away.
Can I transfer an existing mortgage held personally to a limited company if I become a company director?
No. The only limited company mortgage as such is for Buy to Let. If you have a residential mortgage it’s always going to be held personally, even when using your own limited company earnings. They’re your earnings, and the mortgage is your personal mortgage.
People can get confused because it’s a limited company – they think their assets are safe if something happens to the company, which is true in a business sense. But that’s not the case with a residential mortgage – it’s still your personal mortgage and not the company’s.
Are there any fees or additional costs associated with a mortgage for a limited company director?
No, they are exactly the same. The only other fees you’ll have are your own personal accounting fees and running costs for your limited company.
Product fees might be slightly different depending on the lender and the criteria, but they will still be the same as for other customers.
What else do we need to know about mortgages for limited company directors?
When you run a limited company a lot of people take a small salary for tax reasons – around £10,000 a year, for example. Then they wonder how they can get a mortgage on the back of that, as their outgoings are more than that.
But it’s the dividends that you take from the business that help there, and the share of profit. That shows that your company is profitable. The dividends are added to your salary to make up your income for the year.
With limited companies, lenders like to use two years income as opposed to using three months’ pay slips for people employed by a company. That’s the major major difference, really.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Approved by The Openwork Partnership on 25/6/2024.
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