Mortgages For Limited Company Directors

Find out about eligibility criteria, maximum borrowing amounts, and more in our essential mortgage guide for company directors.

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Graham Cox - Founder & Cemap Mortgage Advisor | SelfEmployedMortgageHub.com
Graham Cox
Director & CeMAP Mortgage Advisor

As you'd expect, many company directors come to us seeking help to get a mortgage. They're often unsure how much they can borrow, how many years of accounts they'll need, or even if they can get a mortgage at all.

This in-depth guide to company director mortgages aims to answer those questions and many more.

How many years of company accounts will I need?

Most high street lenders require a minimum of two years, finalised accounts, submitted to HMRC, though some require three.

From the mortgage provider's point of view, several years of trading history help to demonstrate your business is a viable concern.

Fortunately, there are a few mortgage providers happy to lend with just one year's limited company accounts. However, to mitigate the risk to the lender, you may need a higher deposit of at least 10 per cent.

Director mortgages with 2 years accounts

With two or more years of trading history and books, a far wider range of deals, rates, and lenders become available, including most of the mainstream mortgage providers.

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What size deposit will I need?

It's still entirely possible to get a mortgage with a 5% deposit. A 95% loan-to-value (LTV) deal with one year's submitted accounts may be possible, but the majority of lenders will only go to 85%-90% LTV.

Some providers also work on a tiered LTV basis, whereby the max loan-to-value decreases as the mortgage amount increases above a certain threshold. However, this doesn't usually become an issue until you're borrowing £400,000 or more.

For a self-employed remortgage, most lenders allow a maximum loan to value of 90 percent. For SPV mortgages to purchase a BTL property, 75 percent is fairly standard.

Deposit requirements for leasehold properties

Another factor that can affect the maximum LTV, is the type of property you are buying.

You'll usually need to find a larger deposit to buy a flat or maisonette. Compared to house purchases, lenders consider leasehold properties a weaker form of security against the loan. How much deposit you'll need depends on the loan company, but 15-20% is quite common.

You'll find the best mortgage rates and deals are reserved for borrowers with larger deposits of 25-40 percent, but there are still excellent rates available at higher LTV's.

How much can I borrow as a company director?

Assuming you have a large enough shareholding in the company to classed as a self-employed director, not an employee, around 4.5 times either single or joint income.

Many mortgage providers will use your salary (sometimes referred to as director's emoluments) and dividends to calculate your income and maximum borrowing figure.

Others will use salary and net profit, whilst others will consider either option.

Let's take Pete as an example. Pete is a director and 100% shareholder (a.k.a participator) in a bakery business in Wrexham. He pays himself an annual salary of £12500 and draws £37500 p.a. in dividends. Giving himself an annual income of £50000. Potentially he could borrow around £225,000 as a sole borrower.

If Pete was making a joint application and his partner earned £45000, their combined income of £95000 would give a maximum borrowing figure of £427,500 on a 4.5 x income multiple, subject to an affordability assessment and credit check.

Borrowing more if you're a high earner

Banks and building societies are often willing to use larger income multiples for high-earning company directors. Some lenders will permit 4.75 or 5 times income, whilst a few others will go to 5.5 or even 6 times earnings. Others use the same multiplier for all self-employed applicants, regardless of income.

Each provider has its own definition of what constitutes a high earner, but £75000 or more per annum in salary and dividends is a good benchmark.

Always weigh up carefully if borrowing more based on a higher multiple of earnings is prudent.

How is affordability assessed?

All maximum borrowing figures are subject to affordability assessments by the lender's underwriters.

Credit score, ongoing credit commitments, financial dependents, and other committed expenditures like child maintenance and spousal support, are all assessed to determine how much you can afford to borrow.

The FCA requires all mortgage providers to carry out a 'stress test' of the borrower's ability to service the monthly mortgage payment at a much higher interest rate.

Currently, the stress test rate is set at 3% above the lender's Standard Variable Rate (SVR), though this is set to be reduced to 1% in August 2022.

So as you can see, there are many factors lenders have to consider in determining how much you can borrow, and your earnings are just part of the equation.

I'm a contractor and use my Limited company to receive my earnings. How much can I borrow?

For contractors, the situation is slightly different. Mortgage providers will often use your day rate for assessing your income, rather than salary and dividends.

Here's an example. Joanne, works 4 days a week as an IT contractor. Her day rate is £400.  Most lenders will calculate her earnings based on 46 work weeks per year. E.g 46 x 4 x 400 = £73600. Giving Joanne a maximum potential borrowing amount of £331,200 at 4.5 x income.

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Can I get a director mortgage with poor credit?

Yes, you can get a director mortgage if you have poor credit. However, it will make getting a mortgage trickier, and probably more expensive, particularly for severe credit events like an IVA, repossession, or ex-bankruptcy.

Lenders make decisions based on how severe and how recent the bad credit event(s) are.

Some lenders only accept mild adverse. One or two missed credit card payments, or a low-value default or CCJ in the past 2 years, for example.

Others are more flexible and tolerant of severe bad credit, and will even consider mortgage applications from people a few years after being discharged from bankruptcy or settling an IVA.

Keep in mind that, to mitigate the higher perceived risk, mortgage rates tend to be higher for the most severe forms of bad credit, and sometimes even with moderate adverse credit.

Can I borrow using my limited company's net profits?

Yes, borrowing using your share of company net profits is possible with many lenders.

Leaving cash in the business to fund future growth, or to minimise personal tax bills, is often a good idea. But it can have the unfortunate side effect of reducing what you can borrow from lenders who only work with salary and dividends.

Fortunately, some mortgage companies will use your salary and share of any net profit. Potentially allowing you to borrow a lot more.

Using net profit isn't always the best choice though. Our director's mortgage guide to net profit vs dividends explains the pros and cons of each option.

As a company director, am I considered self-employed?

Yes, provided you meet the lender's minimum shareholding percentage. Some mortgage providers require a director to own at least 20% of the company share capital, others 25%.

If you own less than the lender's minimum shareholding, your application will be assessed for affordability as though you were an employee.

Can I borrow based on my most recent year's accounts?

Yes, a few mortgage companies are happy to assess income using your latest year's accounts, and not just an average of the past two. This can be particularly beneficial if you need to borrow more.

For example, Megan has declared a salary and dividends of £65,000 in her latest year, but only £30000 in the previous year.  Giving her an average of £47,500 over two years.

Using just her latest years' books would allow Megan to potentially borrow £292,500 versus just £213,750 with the two-year average.

As part of their affordability checks, mortgage firms will want to see evidence the increase in profit is sustainable growth, and not just a one-off exceptional event.

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What documentation and evidence of earnings will I need to provide?

To evidence your income and trading history, most lenders typically require most or all of the following documentation:

  • Company accounts for the past 2 years (if trading that long)
  • SA302 Tax Calculations and Tax Year Overview docs for the past 2 years
  • 3 months business bank accounts.

For a detailed guide to all the documents you'll need, check out our self-employed mortgage documentation checklist.

Mortgage advice for limited company directors

Applying for a mortgage as a company director needn't be difficult.

A good advisor can explain the nuances of the mortgage market for company directors, save you time, and increase your chances of finding the best deal for your circumstances. If you need advice, or are ready for a quote, please call 0117 205 1695 or take our 90 second quiz here.

Faqs

Get answers to your most common questions below...
Can I pay a mortgage deposit from my Limited Company?
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Yes, you can pay the deposit from your limited company with some lenders. Usually in the form of a dividend payment from retained profits, although a few lenders will accept a Director's loan from the company. Regardless of the scenario, some providers will require the applicant(s) to own 100% of the business.

The lender will often request written confirmation from your accountant that the dividend payment won't adversely affect the running of the company.

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Can I use management accounts to prove my income?
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No, management accounts aren't allowed. To evidence your earnings, only finalised and HMRC submitted limited company accounts are acceptable.

Some providers will request a projection from your accountant. A common reason for requesting a projection is if the most recent year's accounts show a significant increase in profitability. The lender will want to satisfy themselves the improvement is sustainable.

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Can I use a director's loan repayment for income assessment?
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No. If you're a creditor of your limited company, having put money into the business as a Director's loan, any repayment back to you cannot be treated as income for mortgage assessment.

However, if you are charging your business interest on the loan, the interest payments are treated as income on your personal tax assessment. Some lenders will allow that extra income to be considered.

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Graham Cox

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited. Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK find great mortgage deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, Financial Times, and BBC Bristol.