In the past, directors of limited companies found it harder to secure competitive mortgages than traditional employees.
These days, however, enlightened mortgage providers are keen to lend to business owners.
In this guide, we look at how the mortgage process works for limited company directors, what to look out for, and how to secure the best rates.
Can you get a mortgage as a company director?
Yes, absolutely. In fact, if you use a knowledgeable specialist mortgage broker, you should be able to secure a mortgage on high street terms. With the same lending terms as a normal employee.
Standard providers will lend anything up to 95% of the LTV (Loan to Value) ratio of the property. The most favourable rates are available the higher the deposit you’re able to put down.
Proving your income if you are a company director
If you apply for a mortgage as a traditional employee, lenders can easily apply multiples of earnings to calculator how much you can borrow.
This isn’t so easy when it comes to director’s earnings.
Here are some classic scenarios:
- Your salary and dividends may not truly represent the earnings your limited company has generated.
- You may not withdraw all of your retained profits – instead deciding to leave funds in the company.
- Perhaps you co-own the business with your spouse, who will be a co-applicant for a mortgage.
- Your annual turnover over the past 3 years may vary considerably. This may cause problems if a lender bases multiples on your lowest annual turnover sum.
- If you have been trading for less than 3 years, some lenders may be less likely to lend on favourable terms.
What other criteria will affect your mortgage offer?
Alongside your income, the following factors will also affect the amount your can borrow:
- Your credit history. Use a free service like Credit Karma to see what’s on your credit file. If you have CCJs or other defaults, this will significantly affect your ability to borrow.
- Other outstanding debt.
- If you have dependants.
- You age.
- The mortgage term.
- The type of product you take out (fixed rate, variable, etc.)
- The interest rate.
How much can you borrow?
Multiples of 4.5 to 5 times ‘earnings’ are fairly common with major lenders, having taken into account the factors listed above, such as your outstanding financial committments.
Ideally, you should approach limited company friendly lenders who will take into account a number of factors rather than the net income you have withdrawn from your company.
If you’re a limited company contractor, for example, specialist contractor lenders will typically calculate your multiples as follows:
(Day rate (£) x 5 days a week x 48 weeks per year) x 4.5
For example, if your day rate is £500, you could get a mortgage of up to £540,000.
What if my company hasn’t been trading for 3 years or more?
In the old days, many lenders would be reluctant to lend unless your company had been active for 3 or more years.
This is no longer the case, although it will always be easier to demonstrate a track record of your earnings if you have several years’ of final accounts.
There is often a delay between a company’s year end, and the date when the final accounts have been signed off and submitted to HMRC and Companies House.
With this in mind, you could have been actively trading for over 2 years, but only have one set of signed accounts for year one.
Again, you should use a specialist lender, as they will be aware of these nuances, and also the different methods used to prove your earnings.
What information do you need to start the mortgage application process as a director?
Although the paperwork requirements vary between lenders, you will typically need the following:
- 3 months’ personal bank statements – for each applicant.
- Your limited company’s signed annual accounts from at least the last available year
- You SA302 statement from at least the last available year (this can be requested from HMRC via phone, or via your online personal tax account if you submitted your Self Assessment form directly).
- Details of any outstanding borrowing you have (e.g. loans, other mortgages, credit cards).
- Proof of ID.
- Proof of residential address.
- A letter from your accountant containing a reference that your accounts are in order.
Things to do before you apply
- Consider lenders who are well-versed in helping limited company owners.
- Read up on the different types of mortgage, and repayment terms that are available.
- Make sure your credit rating is as strong as it can be.
- Reduce any outstanding debts, where possible.
- Put down as high a deposit as possible to access the best interest rates.
- Make sure your ID is current (e.g. your passport, driving licence haven’t expired).
- Make sure your latest year-end accounts have been prepared and submitted to Companies House.
- Have the required paperwork ready before starting the application process. Delays are possible – for example if your accountant takes his time to prepare a reference.
Use a limited company specialist IFA
We have worked with company director specialists, Broadbench, for many years.
If you’d like more information on how to apply for a mortgage, get quotes, or anything else, simply fill in the form below.
The Broadbench team will get back to you right away.