Self-Employed vs Employed Directors

Learn how self-employed and employee directors are defined by mortgage providers, the lending criteria they use, and the implications for how much you can borrow

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

As a company director, working out how lenders will assess your income for a mortgage is far from straightforward.

It's further complicated by the fact mortgage providers assess some company directors as employees, rather than self-employed.

In this short guide, we explain the criteria lenders use to make this distinction, how your income is assessed if you're treated as an employed director and the implications for how much you can borrow.

How do lenders decide if I'm employed or self-employed for mortgage purposes?

Most mortgage providers consider a company director a self-employed applicant if their shareholding exceeds a certain percentage. The threshold is typically 25 per cent but some lenders use 20%. One mainstream lender uses just 10 per cent.

If your shareholding in the company is lower than the bank or building society threshold, then you'll be treated as employed for mortgage purposes.  

This can mean that just your director's salary is taken into consideration for income assessment, not your dividend income or share of net profits.

As we'll see, this can have a dramatic effect on the maximum amount you're able to borrow.

Can joint applicants' total shareholding be considered when determining employment status?

Yes. Where both joint applicants are shareholders in their business, some mortgage companies will use the aggregate shareholding when assessing their employment status.

For example, if each applicant owns 15% of the company, and the lenders threshold is 25%, both borrowers would be considered self-employed.

Note the above only applies for directors and shareholders of the same limited company, not different businesses.

How long does a company director need to have been employed?

As an employee company director, it's possible to get a mortgage with as little as one month's employment record. However, a requirement for 3-6 months employment history is more common.

If you're working for a family business, some lenders will want to see evidence of 12 months of employment history.

As an employee director, can my dividends or share of net profit share be used?

Yes. Whilst the vast majority of providers only accept an employed director's salary for income assessment, a few will consider salary and dividends/share of net profit.  

Some only use a proportion of the dividend income; 50% is common. Others only use the net dividend figure after income tax has been paid, as declared on your self-assessment tax calculation.

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How much can employed and self-employed company directors borrow?

To see how employment status affects your maximum borrowing potential, let's compare two fictional company directors, Tony and Wendy.

Tony is a director of a haulage firm, on a salary of £75,000 p.a. He only owns 5 per cent of the company shares, and as such, he's classed as a company employee by the lender.

In the latest trading year, he received £25,000 in dividends for his share of the business profits.

Most banks and building societies will only use Tony's salary for mortgage affordability. Potentially allowing him to borrow up to £337,500 (4.5 times his income) as a sole applicant, subject to a credit check and expenditure assessment.

Borrowing more as an employee director

However, one benefit of being treated as an employee rather than self-employed is the potential to borrow at a higher multiple of income.

Some lenders are happy to use a loan-to-income (LTI) multiple between 4.75 and 5.5 times earnings for employed applicants. Particularly if you're classed as a high-earner, which is typically for income around the £70000-£75000 per annum mark.

Which means, with the right lender, it's possible Tony could borrow between £356,250 and £412,500 just using his salary alone.

Using his dividend income as well, which some lenders permit, he could potentially borrow up to £550,000.

How a self-employed applicant's borrowing capacity is calculated

Wendy, on the other hand, is a 100% shareholder in her ecommerce business selling Thai food supplies. As such, she'll be applying for a mortgage on a self-employed basis.  

She draws a salary of £12500 and took £37500 in dividends in the latest trading year.

Because of the size of her shareholding, Wendy's borrowing capacity is likely to be capped at £225,000 using a loan to income multiple of 4.5 times earnings.

If, on the other hand, she drew a salary of £50,000, her combined income of £87,500 could allow her to borrow £393,750.

You can learn more about limited company director mortgages by reading our in-depth guide here.

The advantages and disadvantages of being an employed director

As you can see, an employee limited company director has a couple of advantages over their self-employed counterpart.

  1. they can potentially borrow more using a higher loan-to-income multiple
  2. they can apply for a mortgage after being in the director's role for as little as one month.

The main disadvantage for an employed director is that your dividend income may be excluded for mortgage affordability.

Self-employed applicants also tend to have higher earning capacity as they take a greater share of profits.

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"Brilliant from start to finish. Graham managed to find a main high street lender who offered a brilliant rate. Would highly recommend."

Tracy Boyle - Google Business Review
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Getting a director mortgage quote

Navigating the lending criteria around self-employed and employed director mortgage applications is far from straightforward.

At SEMH, we steer you through all this complexity to find the right mortgage provider for your individual circumstances.

Accessing a huge panel of mainstream and specialist lenders,  we always source the cheapest pound-for-pound deal, subject to qualification, after including any arrangement or other lender fees.

We have access to thousands of mortgage deals, including products specifically designed for self-employed applicants.

To find out more, call 0117 205 1695 (our opening hours are 9am to 5pm Monday - Friday).  Or if you prefer, simply complete our 90 second quiz and we'll call you back.  

The initial call only takes about 10 minutes. At the end of it we'll indicate if you're eligible, and your maximum borrowing amount. And we'll of course answer any questions you have, before discussing the potential next steps.

So get in touch and let's find the right mortgage deal for your circumstances.

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.