Many directors elect to minimise their personal tax liability by retaining some company profits on the balance sheet. Perhaps you're one of them?
Whist understandable, retaining profits can have the unfortunate side effect of restricting your borrowing capacity with mortgage lenders.
The fact is, many banks and building societies still use salary and dividends to assess director's income. Often by taking an average from the last two to three years' tax calculations.
So by restricting dividends, directors can unwittingly reduce how much they can borrow.
The good news is some mortgage providers have introduced more flexible lending criteria, including the use of net profits. Better yet, some work off your latest year's net profit and salary, rather than an average.
As a result, it's now possible for a limited company director to have the best of both worlds. Maximising how much they can borrow on their mortgage, whilst minimising their tax bill by restricting dividends.
Read on to find out more...
- Can I use my latest year's company net profits to get a mortgage?
- How do I qualify?
- How do mortgage lenders assess rising profits in a limited company?
- Do any lenders accept the latest year's pre-tax net profit?
- Can my latest year's salary and dividends be considered instead of net profit?
- How much can I borrow using my share of the latest year's net profit?
- How can I get a mortgage?
Can I use my latest year's company net profits to get a mortgage?
Yes, nowadays, many banks and building societies are happy to consider your share of the latest year's net profit after corporation tax for income and affordability assessment.
That said, most still prefer to average salary and dividends or salary and net profits from your last two or three years company accounts.
How do I qualify?
For those lenders that allow it, the main stipulation is that profits have increased from the previous year. A consistent track record of increasing profits year-on-year is preferable.
Are company profits volatile?
Banks and building societies may use an average figure if trading performance is erratic. For example, rising profits in year 3, followed by a decrease in year 2, and an increase in the latest year could raise a red flag with a lender.
Do the applicants' have a sufficiently large shareholding?
Some lenders only consider the latest year's net profit and remuneration if the applicant is a self-employed company director with at least a 50% shareholding in their company.
Others require 100 per cent ownership. Joint applicants, who own 50 per cent or more equity between them are also sometimes acceptable.
How falling profits are assessed?
Falling profits can ring alarm bells, particularly if the falls are substantial.
For example, where the decrease in profit from the previous year is greater than 20%, some mortgage companies won't lend at all.
Others, who would normally use the an average of the past two or three years's net profit share for rising profits, will almost certainly use the latest year's reduced figures instead.
