Director Mortgages Using Latest Year's Net Profits

Maximise your borrowing capacity using your share of your company's latest trading year net profit.

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Graham Cox - Founder & Cemap Mortgage Advisor | SelfEmployedMortgageHub.com
Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

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?

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.

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How do mortgage lenders assess rising profits in a limited company?

Where the latest year's company net profits have risen by 20-25% or more, banks and building societies may require further information to reassure themselves that the increase is sustainable.

Why are company profits increasing?

The context around rising company profits is vitally important.

For example, did profits only rise due to a one-off event such as a asset sale? Did market conditions happen to be beneficial to the business? If so, are they likely to continue?

Is the increase in profits sustainable?

For understandable reasons, all mortgage providers want to satisfy themselves that profits are increasing sustainably.

If they believe that trading performance is unlikely to be maintained, they'll probably use an average of the last two years trading figures, instead of the latest year's accounts.

Does current trading performance validate the latest year's figures?

Some providers may also request an accountant's projection for the current trading year to check profits are stable or continuing on their upward trajectory. Especially if the company year end was some time ago.

Lender's will also check the applicant's three most recent monthly business bank statements. On occassion, the last six.

Do any lenders use the latest year's pre-tax net profit?

Yes, there's currently one mortgage provider who'll consider using a company director's latest year salary and share of pre-tax net profit. However they'll only consider it:

  • as an exception
  • your company has a minimum of three year's trading history
  • if net profit is higher in the latest year

A few banks and building societies allow pre-tax profit and salary averaged over the last two year's or the latest year's results if lower. Again, some stipulate the applicants must own 100% of the company, others accept a 50 per cent shareholding.

Can my latest year's salary and dividends be considered instead of net profit?

Yes, a few mortgage companies are happy to consider your latest tax year's salary and dividends instead of salary and net profit.

But why would you consider this?  Well, it can be beneficial where your company year end and UK tax year are unaligned.

For example, let's say your company accounting period ends on 30th September 2022.

If trading performance improves after the year end, you could report increased dividends on your self-assessment tax calculation the following April. Using your salary and dividends in that scenario makes sense.

The lender may ask for a projection or management accounts to verify the sustainability of current trading.

And bear in mind, If extra dividends have been paid from retained profit built up over previous years' trading, it's unlikely to be accepted.

How much can I borrow using my share of the latest year's net profit?

As a rule of thumb, the typical loan-to-income (LTI) for self-employed mortgage applicants is 4.5 times single or joint income.

So if your latest year's net profit was £50,000 and your salary £12500, you could potentially borrow up to £281,250 (4.5 x £62500). But bear in mind, each lender calculates their maximum loan amount differently.  Factors they'll consider include:

  • Your income
  • The loan to value (LTV)
  • The type of property being purchased: flat, house, detached, terraced etc.
  • The lender's internal credit scoring system
  • Your credit history
  • The location of the property.
  • How many children or other financial dependents you have
  • Ongoing credit commitments
  • Other financial commitments such as spousal support, private education fees etc.
  • The lenders risk appetite.

That said, it may be possible for high net worth or high earning applicants, including those self-employed in well paid professions like lawyers, architects, locum doctors and dentists to borrow up to 4.75 or 5 x income.

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How can I get a mortgage?

The next step is to speak to an independent adviser at SEMH.  Self-employed mortgages are all we do, and net profit mortgages, often based off the latest year's trading accounts, are our bread and butter.

When you get in touch, we'll advise if your case is proceedable, how much you can potentially borrow and answer any questions you have.

Then, if you're happy to continue, we'll guide you through the entire mortgage application process, removing the stress, time and hassle of doing it all yourself.

We'll also source the best pound-for-pound mortgage product from across the market, based on your unique circumstances. Factoring in the cost of any mortgage related fees such as product fees, valuation fees and so on, as well as any incentives like cashback from the lender on completion.

Potentially saving you thousands of pounds.

To start, complete this quick and easy quiz or call 0117 205 0655 for a friendly, no-obligation chat to discuss your mortgage requirements.

Our office lines are open between 9am and 5.30pm Monday to Friday. There's no call-center, or call waiting. You'll speak to an adviser direct.

We look forward to talking with you soon.

Graham Cox - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

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 get great mortgage and protection deals.

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