When applying for a limited company director mortgage, there are a few ways an applicant can have their income assessed .
Some lenders use salary plus dividends. Others accept salary plus your share of the company's net profit. Even if some profit is retained within the business.
A few mortgage providers can even consider using your salary and share of pre-tax profits.
The example below shows how these three different lender income-assessment methods can have a huge effect on potential borrowing.
In this example, using PAYE salary and dividends produces assessable income of £52,570. A lender using salary plus the director's share of post-tax company profit could assess £82,473, while a lender able to use pre-tax profit could assess £102,570.
At the same illustrative 4.5 times income multiple, the difference between the first and third methods is £225,000 in potential borrowing.
Some higher-earning applicants may be able to access higher loan-to-income multiples. Potentially 5-6 times income, depending on the lender, income, deposit, mortgage size and overall affordability.
However, using net profit for affordability isn't automatically the best option. Depending on your latest trading figures, dividend history, company year-end and the mortgage products available, salary and dividends can sometimes produce the stronger application.
In this guide, we explain the main ways lenders assess limited company director income, when each method can work to your advantage, and why choosing the right lender can make such a difference to your borrowing capacity.
Can I use salary and dividends for mortgage affordability?
Yes. Using salary and dividends is still the most common way that banks, building societies and other lenders assess a self-employed company director's income for mortgage affordability.
In most cases, an average of the last 2 years remuneration and dividends is used, but a few providers work off the latest year's figure.
To evidence proof of income, you'll need your last two years' self-assessment tax calculation (SA302), and tax year overview documents.
Of course, for a variety of commercial and tax-planning reasons, it's common for directors to retain profits in their company rather than withdrawing all available profit as dividends. Unfortunately, this can often mean their salary and dividend income is insufficient to secure the size of mortgage loan required.
One obvious remedy is to increase dividend payments. But that of course, increases the amount of income tax payable. An alternative is to use a lender that can assess your salary plus your share of company net profit.
