How much deposit will I need?
Subject to the usual credit checks, there are many 5% deposit mortgages available for limited company directors with two or more year's HMRC submitted accounts.
However, with just a single year's accounts, mortgage lenders typically require a 15 per cent deposit.
Other factors that affect mortgage deposit requirements
Another thing to bear in mind is that mortgage lenders work on a tiered LTV basis, whereby the maximum loan-to-value decreases as the mortgage amount increases above a certain threshold.
The good news is this doesn't usually become an issue until you're borrowing £400,000 or more.
For a buy- to-let purchase or remortgage, the maximum LTV is typically 75 or 80 per cent. Speak to a mortgage broker at SEMH if you want to find out about the options available to you.
Deposit requirements for new build leasehold properties
Another factor that can affect the maximum LTV, is the type of property you are buying.
Some lenders require a larger deposit of 10-15 per cent to buy a new build flat or maisonette.
New build properties are sold at premium prices and so, a bit like driving a brand new car off a dealer's forecourt, can depreciate in the first two year's of ownership.
In addition, leasehold properties are considered a weaker form of security, so a bigger deposit helps mitigate their risk.
You'll find the best mortgages for company directors are reserved for borrowers with larger deposits of 25-40 percent, but there are still excellent interest rates available at higher LTV's.
How much can a company director borrow for a mortgage?
A company director can borrow around 4.5 times either a single or joint income for a mortgage. For higher earners, 5-6 times income is possible, depending on circumstances.
Regardless of the loan-to-income multiple used, limited company directors must have a sufficiently large shareholding in the company to:
In assessing your self-employed income for affordability, the bank or building society will use either:
- salary and dividends OR
- salary and share of net profit in the company.
The majority of high street lenders still work off base salary and shareholder dividends.
Also, it's important to bear in mind that they won't accept the dividend figure if it's been boosted from previous year's retained profits. Only dividends taken from net profits in the most recent year will be considered.
Fortunately, there are mortgage lenders happy to consider salary combined with a share of net profits, potentially allowing you to borrow more.
This means you don't have to pay yourself extra dividends from your net profit simply to get the mortgage you need.
So it's a tax-efficient method of borrowing too.
Either way, most lenders average the income over the last 2 years. However, it is possible to get a mortgage based off salary and net profit from the latest year's company accounts.
A couple of lenders will even consider pre-tax net profit. Of the two, one will just use your latest year's figures, though they are significantly more expensive.
To see how the different methods of income assessment affect the maximum borrowing amount, let's run through a few examples:
Example 1: Salary and dividends
Pete is a company director and 100% shareholder in a bakery business in Wrexham.
His limited company declared net income after corporation tax of £47500 in the accounting year ending March 2023. In the previous year, net profit was slightly lower at £46000.
However, to keep himself below the higher rate income tax threshold, Pete paid himself an annual salary of £12500 and drew dividends £37500 in the 22/23 tax year, exactly the same as the previous year.
With an annual income of £50000 and 4.5 Loan-to-Income (LTI) multiple, he could potentially borrow up to £225,000 for a self-employed mortgage.
Example 2: Latest year's salary and post-tax profit
Using the same 4.5 x income multiplier and Pete's latest year net profit figure of £47500, he can now borrow £270,000.
The calculation is ((£12500+£47500) x 4.5).
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.
It's possible to borrow 4.75 or 5 times income, whilst a few lenders will go to 5.5 or even 6 times earnings for high earners or self-employed professionals in exceptional circumstances.
Each mortgage 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 and that you are comfortable with the monthly mortgage repayments.
How is affordability assessed?
All maximum borrowing figures for company directors are subject to affordability assessments by the lender's underwriters.
With mortgages for company directors, your credit score, ongoing credit commitments, financial dependents, and other committed expenditures like child maintenance, private school fees and spousal support, are all assessed to determine how much you can afford to borrow.
Stress testing mortgage affordability
The FCA also requires all mortgage providers to carry out a 'stress test' of the borrower's ability to service the monthly mortgage payment at a higher interest rate than the mortgage rate available.
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. In many cases, subject to a satisfactory credit history, your day rate can be considered when assessing your income.
Let's take Joanne, a limited company director who works 4 days a week as an IT contractor and wants to get a mortgage to buy her first home. Her day rate is £400.
Most lenders will calculate Joanne's earnings based on 46 work weeks per year. E.g 46 x 4 x 400 = £73600. On a 4.5 income multiplier, her maximum borrowing amount could potentially be as much as £331,200.
How has the cost of living crisis affected mortgage affordability?
Since the Bank of England started raising the base rate in December 2021, and the cost of living crisis hit in 2022, lenders have progressively increased their interest rates as well as tightened affordability criteria for self employed mortgages.
Each provider uses it's own methodology to calculate a maximum borrowing amount, so company directors won't aren't always able to borrow the full 4.5 income multiplier. Particularly if there are large outstanding credit commitments.
