Net Profit vs Dividends For Director Mortgages

Discover how net profits and dividends are treated for income assessment when applying for a company director mortgage.

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

Many company directors who come to us seeking a mortgage are uncertain how their income will be assessed, and therefore how much they can borrow.

A common concern is that lenders will allow dividends for income assessment, but not net profits.

Thankfully, that's not the case.  

The aim of this guide is to clarify the different ways in which a limited company director's income can be considered, allowing you to plan ahead and maximise your chances of borrowing the amount you need.

Using dividends and salary for mortgage income assessment?

Salary and dividends is still the most common way that banks, building societies and other lenders assess a 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 will use the latest year's figures.

To evidence your salary and dividends for each tax year, lenders require your self-assessment tax calculation or SA302, and tax year overview documents.

But this is where the law of unintended consequences kicks in. One of the drawbacks for a company director is where you've intentionally retained profit in the company to reduce dividend payments and minimise your personal tax bill. 

One obvious remedy is to increase dividend payments. The downside, of course, is that your income tax liability will increase.

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Is it worth using dividends rather than net profit?

Yes. In some scenarios, it can be beneficial for the mortgage application to use dividend and salary income.

Scenario 1: Improved trading performance

The most common use case is where the company financial year or accounting period is not aligned with the fiscal or personal tax year (eg, April 6th 2021 to April 5th 2022).

For example,  if your company year end is August 31st 2021, but your business performance has improved markedly since then and profits have increased.

The dividend income declared in your 21/22 self-assessment tax calculation could potentially be a lot higher than your share of net profit showing in the company's filed accounts.

Borrowing more using higher dividend payments

As most mortgage companies use a loan-to-income (LTI) ratio of around 4.5 times income for company director mortgages, this can make a huge difference to how much you can borrow.

For example, an increase in income of just £22,223 would mean you could potentially borrow an extra £100,000, subject to affordability assessment.

Scenario 2: Lenders who only consider salary and dividends

The other scenario is where the most suitable mortgage deal is with a bank or building society who only works off salary and dividends.

Most lenders tend to specify one type of income assessment, whether that be salary and dividends or salary and share of net profit. A few, more flexible lenders will consider either method.

The ideal situation therefore, is to have high enough earnings for the required mortgage loan, regardless of which form of income assessment is used.

Using net profit and salary

As the number of self-employed mortgage applicants has grown over the years, banks and building societies have become more flexible in their lending approach.

No longer can you only borrow against your salary and dividends. More mortgage companies than ever are happy to consider lending based on your salary and share of limited company net profits.

Can I borrow based solely off my latest years company net profit?

Yes, as well as your director's salary, some mortgage loan providers will use your share of the latest year's net profit figure after corporation tax. However, there's a couple of things to keep in mind...

Are increased profits sustainable?

First, where the latest years net profit is substantially higher (20-25%+) than the previous year, the lender may seek further information from your accountant to assure themselves the increase is sustainable and not simply due to one-off factors.

By the way most mortgage providers require your accountant to have a qualification from one of the recognised accountancy bodies such as the The Institute of Chartered Accountants (ACA/FCA) or The Association of Chartered Certified Accountants (ACCA/FCCA).

Without a satisfactory explanation, the lender may decide to average the last two or three years figures instead, which could result in a lower maximum borrowing figure.

Do you own a large enough stake in the limited company?

Second, some banks and building societies only use net profit rather than dividends, where the director owns a minimum percentage of the limited company. Typically 50%. However not all lenders have this stipulation.

Do any mortgage lenders use the net profit figure before corporation tax?

Most mortgage providers only consider the net profit after corporation tax, plus the applicant's salary.

However, there are a few lenders who'll work with use director's remuneration and share of pre-tax net profits.  As you'd expect, it can make a huge difference to the amount you can borrow.

Using pre-tax net profits with 2 years accounts

At present, these lenders take an average of income from the last 2 years trading figures. None will use just the latest year's trading accounts, unlike some of the mortgage loan providers who work with post-tax net profit..

So it's not always clear cut as to which provider is the most flexible when it comes to how much you can borrow.

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Can I use retained profits to get a mortgage?

Yes, some lenders will work with director's remuneration, dividends and share of retained (aka residual) profit for the latest year.

It's also possible to use your share of retained profit for the deposit.

Normally the bank or building society requests a letter from your accountant to confirm the withdrawal of retained profit as a dividend payment will not negatively impact the business.

Speak to a mortgage advisor

If you'd like specialist advice from a dedicated self-employed mortgage broker, get in touch today on 0117 205 1695. We can quickly give you an indication of how much you can borrow, as well as source the best deal for your circumstances.

Alternatively, take our easy mortgage quiz and we'll be in touch asap, usually within minutes during our office hours of 9am - 5pm Monday - Friday.

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.