Limited Company Director Mortgage
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Limited Company Director Mortgage (Part 1)
Joe Capon explains how mortgages for limited company directors work.
How does the mortgage process work for a limited company director?
The process is very similar to that for an employed or self-employed person. The only difference is how your income is assessed.
Some lenders have certain criteria or lending scenarios that can benefit limited company directors. If you own a limited company, you’ll have a shareholding – it could be anywhere from 1% up to 100%.
Certain lenders may prefer you to have a larger share in a limited company, while others can consider just a 20% shareholding.
The mortgage process is very similar to normal. Your credit history is still taken into account, as is the property you’re looking to buy. You still need proof of your income via certain documentation. Getting advice can be really crucial here, in finding the most suitable lenders for you as a limited company director.
Are there any specific mortgage products designed for limited company directors?
There are no specific mortgage products for limited company directors on a residential mortgage. It’s more focused on whether you’re a first-time buyer, you’re moving home or looking to remortgage.
That, and the size of your deposit, will determine the mortgage products available to you.
If you’ve got a 5% to 10% deposit, you can access the same products as anyone else. You’re not penalised or restricted to certain products because you’re a limited company director.
On the Buy to Let side, however, mortgage products can differ for a limited company. This is where someone sets up a limited company specifically to buy and rent out a property, and there are specific limited company mortgage products for that.
Do many lenders offer mortgages to limited company directors?
Yes, all lenders offer mortgages to limited company directors. Again, certain lending criteria can make lenders stand out. It’s not just interest rates. Lenders all have basic criteria around credit history, age, credit commitments and whether the client has any children.
In terms of income criteria, many lenders look at salary and dividends. Depending on how long the company’s been trading, they may take an average of the last two years, or use the salary plus share of the profits for that limited company.
If your latest year’s earnings have been a lot higher than the previous year, some lenders can just look at the latest year. Get advice and we will put a plan together for you, to give you the best benefits from what you’re looking to do.
What are the eligibility criteria for obtaining a mortgage as a limited company director?
For a residential mortgage, lenders typically look at the company accounts for the last two years. A few lenders will consider your application after trading for just one year, but the options will be much more limited.
If you’ve been trading for two years or more, lenders look at whether the company profits have increased year on year, and also what salary and dividend income has been taken each year. If those figures have increased, they often take an average.
They will use either company profits or your dividends, depending on the lender and their criteria. An advisor will let you know which will be the better option for you.
With Buy to Let via a limited company, there aren’t normally any restrictions around trading history. Lenders just check what type of business the company is allowed to trade in, via the SIC codes registered with Companies House.
Buy to Let mortgages via a limited company can be more complex, so always get advice on the options here.
What documents are typically required when applying for a mortgage as a limited company director?
For a residential mortgage, a lender will typically want your latest two years’ accounts, which you normally obtain from your accountant. In addition, some will also want your latest two years’ tax returns and tax year overviews. Again, you can get these from your accountant or online from HMRC.
For a Buy to Let mortgage via a limited company, accounts aren’t normally needed. It’s just that information stored at Companies House around what the company can trade in and the SIC codes the company is set up with.
You also need a company bank account for the mortgage payments to be taken from. If you already have Buy to Let properties in your personal name or within the limited company, we may need to complete a schedule listing the full portfolio of properties. Again, this will differ from lender to lender.
A mortgage broker will point you in the right direction and put together a plan to suit your needs.
How do lenders assess the income of limited company directors for mortgage purposes?
For residential mortgages, it differs from lender to lender. Some lenders use salary and dividends over the past two years. If that salary and dividend total has increased year on year, they take an average. A small number of lenders potentially look at the latest year.
Some lenders may look at the company accounts, and instead of using the dividends and salary, they use your share of the company’s net profit plus salary. This can sometimes boost affordability. We will always advise what’s going to work best for you.
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How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?
This is similar to my previous answer. Lenders will use the dividends drawn from the company as income, along with salary. Other lenders use the net profit from the company. Normally dividends are lower than the profits – as dividends come from those company profits.
To give you an example, if someone takes a salary of £12,000 each year, and for the last two years they’ve taken dividends of £25,000, this would give them a usable income of £37,000.
Perhaps the company had a profit of £50,000 each year for the past two years. Using the retained profits, we could get a lender to take your income as £50,000 plus the salary of £12,000, giving us a usable income of £62,000 – which is significantly more than £37,000.
However, what you must consider is that increased borrowing potentially brings you a higher monthly payment. This is where it’s vital to speak to a mortgage advisor, see the options available to you and get an idea of how much it’s all going to cost. With that information, you can decide what’s right for you – both now and in the future.
Can I still get a mortgage if I have a limited trading history as a company director?
Yes. Normally the minimum trading history is 12 months and the sweet spot is two years. If you’ve been trading for at least two years, it opens up the doors to more lenders and products. A select few lenders can consider you once the company’s been trading for 12 months.
Are there any advantages or disadvantages on a mortgage as a limited company director rather than a sole trader?
From a mortgage perspective, I wouldn’t say there’s any disadvantage for a limited company director over a sole trader.
An advantage is that for limited company director income, either dividends or share of net profit could be used. For sole traders, only net profit is used.
There are different ways to explore things for a limited company director, opening up different lending criteria. It’s key to get advice from a mortgage advisor who is experienced in dealing with self-employed individuals.
You can potentially access more mortgage products or increase your borrowing. We can also give you an idea of possible pitfalls, that you would never have seen if you’d gone directly to a bank.
Are there any restrictions or limitations on the types of properties that can be purchased as a limited company director?
No, there are no limitations on the property type for a limited company director. The property will always be assessed the same way, whether you’re employed, a sole trader or a limited company director.
A lender will do a mortgage valuation, either with a physical visit to the property, a drive-by valuation, or by desktop. Often the lender won’t come out to the property; they use online resources to conduct the valuation.
There are no general limitations or restrictions on the property at all, and this isn’t influenced by whether you’re employed or self-employed. There are some properties that certain lenders won’t accept, while others will.
Give your mortgage broker all the information about the property you’re looking to buy, or you already own. Your broker will work with the estate agent to answer any questions, and then we can put you with the right lender for you and the property.
What else do we need to know about a mortgage for a limited company director?
What’s been covered today just gives you a brief overview of what limited company directors need to think about and look out for. If you have any questions, just get in touch.
Key Takeaways:
- The mortgage process for limited company directors is similar to others, with the main difference being how income is assessed.
- There are no specific residential mortgage products for limited company directors; product availability depends on factors like first-time buyer status, moving home, or remortgaging, and deposit size.
- All lenders offer mortgages to limited company directors, but their specific lending criteria for income assessment can vary (e.g., looking at salary and dividends, or salary plus share of profits).
- Lenders typically require two years of company accounts for residential mortgages, though a few may consider one year of trading history.
- For Buy to Let mortgages via a limited company, trading history restrictions are usually not present, but lenders check the company’s SIC codes.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.