Mortgages for Company Directors
There are around 700,000 directors of limited companies in UK and being a director can sometimes create some challenges when looking for a mortgage.
If you need support finding a mortgage then our specialist brokers are here to help. With many years of experience in assisting company directors, they can talk you through the process and search the market for a great deal.
It’s true that applying for a mortgage as a director can involve a few extra hurdles when compared to someone who is fully employed.
This mainly concerns proving your self-employed income so that the lender has a complete picture of your annual earnings. It is also very common for directors to be involved in other businesses, own investment properties and have multiple streams of income, adding further layers of complexity.
However, it is not all doom and gloom. The mortgage market for directors is strong and by working with a specialist adviser you will have access to an array of competitive deals.
Why are mortgages for directors more complicated?
Alongside self-employed people and sole traders, proving your income is generally what makes applying for a mortgage more complicated.
When you are a director of a limited company, the mortgage lender will want to see a lot more information in order to assess whether they are happy to lend you money.
This includes your company accounts and personal financial statements for the last few years. They will also want to know about your other business interests and how these are structured, as well as any Investment properties you might own.
You can’t just provide a P60 and some bank statements to prove your income. Company directors have a lot more to think about and this is where working with an expert mortgage broker can save you time, money and a whole lot of stress.
They will know which mortgage lenders are happy to lend to directors, what information they need and how to present it in the most favourable way. This knowledge and expertise can make all the difference when it comes to securing a mortgage.
Accountants will generally advise that you take a small salary, just under the national insurance threshold, and then top this up with dividends from the annual profits. This is a sensible approach from a tax point of view but it does make it harder to prove your income for mortgage purposes.
These payments can be monthly, quarterly or just every now and then and the main lenders struggle to get this to fit into their standard model. Also, dividends should only be taken out if you actually need the money, otherwise they are left in the business as retained profits, saving you on unnecessary income tax.
There are two types of company director
For lenders there are 2 types of director, those that own a significant portion of the business, and therefore can exert some control, and those that own either a small percentage or none. To be a director of a company you do not need to own any shares in it.
0-24% shareholding
If you own no shares, or less than 25% of the company, you will normally be treated as a PAYE employee and not a director for the purposes of the mortgage.
This is because you do not have a controlling share of the business.
25-100% shareholding
With share ownership of 25% or more the lenders will assess you as being self-employed. You have a controlling influence over the performance of the business and it’s actions.
This directly affects your future income and the stability of the company.
While most lenders work with a shareholding threshold of 25% there are some that have a lower limit of 20%
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Eligibility Criteria
Eligibility criteria for directors does differ quite a bit between lenders. We suggest you discuss this with your mortgage broker before making any firm plans.
You first need to understand whether you will be classed an an employed director or a controlling director. We look at this briefly above. If a lender sees you as an employed director then they probably only need to see payslips and P60.
However, if you own more that 20/25% shares in your business then the lender assesses you as self-employed and requires a bit more information.
It takes an experienced eye and expert knowledge to accurately assess a mortgage application, but some lenders just prefer to take the easy route and only accept the ‘simple’ or ‘standard’ mortgages. Now a director of a company is not ‘non-standard’ but correctly analysing your financials is a step too far for some.
For self-employed mortgage applicants most lenders will ask to see 3 full years of trading with formatted accounts. This is the ideal situation and gives them the best picture of your income situation.
But we know that this is not always possible. So our advisers can competitively place deals that are open to directors who have been in business for less than three years.
What income do lenders accept?
How your income is assessed, and what can be included, can differ between lenders. Not an ideal situation for someone looking to change their mortgage or possibly move house.
The good news is that we regularly work with specialist lenders who fully understand directors and will accept all of the following:
PAYE SALARY
It is common for directors to be paid a fixed salary up to the National Insurance threshold and take dividends for the rest of the income. At the same time it is possible to have additional payments or bonuses through the PAYE system although this tends not to be as tax efficient.
PAID DIVIDENDS
These are dividends that you have actually received the money for! Dividends are a share of the net profits that can be paid to the shareholders, according to the percentage shares that they hold. By their nature dividend distributions will differ from year to year as the profit fluctuates.
The timing of a dividend payment can be important for your mortgage application. It is the date that you receive the payment that determines what income tax year it is allocated to, this is different to your company year end.
RETAINED PROFITS
If you are eligible to receive a dividend but don’t actually need it the sensible option it to leave the money in the company. This is retained profit. It will be shown within your accounts and carried forward to each trading year. This is essentially money that you are eligible for but have not yet received.
Speak to a Company Director Mortgage Expert
Solutions for residential and investment properties.
Proving your income
When anyone applies for a mortgage the lender will need to see documents that prove their income.
For a shareholding director this will be:
- Limited company accounts (3 years)
- SA302 Self Assessment Tax Calculations (3 years)
- Tax Year Overviews (TYO) from HMRC
- 6-12 months of personal bank statements
The actual documents needed will depend on the mortgage lender at the time of application.
Let’s look at each document:
Limited company accounts – These will be the finalised accounts for your business as submitted to HMRC and Companies House. Your business accounts show your trading position and profit levels for a given year. When looking at three consecutive years you begin to see a pattern of income, expenses, capital expenditure and profit. Within the accounts there will be reference to dividends taken and also retained profits (undistributed profit).
SA302 – An SA302 is the official HMRC year end Tax Calculation that is based on your submitted self assessment information (your tax return). The tax year runs from 6th April to 5th April each year. If you are self-employed or a company director then you most likely need to submit a tax return every year that includes all of your income. The SA302 provides a convenient summary that is accepted by lenders as proof of your overall earnings, from all sources.
Tax Year Overview – A Tax Year Overview (TYO) shows the status of your tax payments and the information should correlate with your SA302 for the same period. It is a statement that lists tax payable, tax paid and tax outstanding.
Personal bank statements – Bank statements are requested to see how and when you receive income and also how you spend it. Lenders are likely to ask about aspects of your finances such as travel and commuting costs, childcare, holidays, credit card repayments, loan repayments, and socialising.
Self-certification mortgages
Self-certification, or self-cert, mortgages allowed borrowers to apply for a mortgage but without the need to prove their income. You need to declare what you do and how much you earn but no verification takes place.
These played a part in the financial crisis of 2007-2008 as borrowers were obtaining mortgages that were not affordable.
Financial Planning
One of the big financial advantages of being self-employed and running your own business is that you have a degree of control over your own income and how much tax you pay.
Your accountant will advise you about when to withdraw profit and ways to reduce the tax you pay. Unfortunately this low tax strategy can work against you when applying for a mortgage as it tends to minimise your income position.
The solution is to start planning 6-12 months ahead. Speak to your accountant and mortgage adviser to see what adjustments are needed to ensure your financial position is as strong as in can be when the time comes to apply for a mortgage.
Mortgage advice for company directors
In your role as a Company Director you will have various professionals and advisers that you can call on to provide you with solid, robust advice.
Our brokers can provide the same service for your residential mortgage, property investment mortgage or commercial mortgage.
They are experts in helping clients to secure specialist mortgages suited to the self-employed and directors. They work with lenders who can look beyond the tax assessment to consider retained profits and accountants projections as proof of income.
Fully FCA regulated, they have more expertise across more lending solutions than any other broker and have specialist teams in place to work with clients through every stage of their journey.
FAQ
Frequently Asked Questions
Do Directors have to pay higher mortgage rates?
No. Directors will pay the same rate of interest as an employed person who qualifies for the same deal.
How many years accounts will I need?
All lenders would prefer to see 3 full years of trading accounts. This gives them the best view of the business. However, this is not always possible so there are lenders that will accept less.
Are Directors self-employed?
If a Director owns 20/25% or more of a company then the mortgage lenders will assess them as being self employed.
I need a buy to let mortgage, can you help?
Yes. You can read more about our buy to let mortgage service here.
Are you independent?
We work with one of the largest and most experienced independent mortgage brokers in the UK.
My situation is complex, can you still help?
Yes, of course. The range of expertise covers all types of situations from simple to complex.
