Most people assume that employees can easily get a mortgage, while limited company directors can’t. In reality, there are hurdles for both, just different ones.
In this article, we’ll delve into how company directors can be tax-efficient and still get a mortgage for their dream home.
Tip 1 – Lenders can assess your income in different ways
The traditional way is to get a mortgage as a company director based on your director’s salary and dividends. However, according to BlueWing Financials, most directors only take a small salary and only as much dividends as they need.
This is normally not enough to get the necessary mortgage loan for your dream house.
The good news is that a lot of lenders acknowledge that the profit is yours, even if you didn’t take it out as dividends. Consequently, they are prepared to use your limited company profit for income assessment.
What’s more, some lenders even take the profit before tax figure, not the profit after tax figure, which will give you an even higher mortgage amount!
Tip 2 – 1 year company accounts are enough
Whilst some lenders still insist that your company has 2-3 years Ltd company accounts, others are more flexible and can offer a mortgage even after 1 year of trading.
If you switched from sole trading to a limited company, then even the more traditional banks are able to consider you. In this scenario, you would have one or more years of self-employed income as a sole trader plus 1 year of limited company accounts, so you meet the requirement for 2-3 years of self-employed history.
The only thing is that you do need a minimum of 1 year of limited company accounts. If you have recently switched from sole trading to Ltd company, you’ll have to wait until you have your first full year of company accounts prepared.
Tip 3 – Lenders like growing businesses
Sometimes it’s easier said than done.
The pandemic hasn’t exactly helped a lot of businesses, while others did well. If your business results declined, it’s not the end of the world: some lenders are prepared to ignore the 20/21 business year figures.
Generally speaking, though, lenders like stable businesses or growing businesses. Even if the growth is minimal. It fills lenders with confidence that you’ll have a stable income to repay the mortgage.
Some may even use just the latest year’s income instead of averaging!
From a mortgage lender’s point of view, it’s better to have a profit figure of £10 more, rather than £10 less than last year. £10 here or there may not be much, but it’s the difference between showing a stable business or one that’s going down.
Tip 4 – Lenders can accept your company making a loss
Being cautious, most lenders would require that your limited company didn’t make a loss within the last 2-3 years.
Then again, some lenders only ask that your company didn’t make a loss in the most recent closed business year.
And there are very few, who can consider a loss in the latest business year, as long as you have a reasonable explanation and a solid plan to get back to making a profit and evidence of recent income showing reliable improvement.
Tip 5 – Dividends should not exceed the company profit after tax
In theory, shareholders take dividends from the taxed profit that the company made in that year.
However, if shareholders didn’t take out all the profit as dividends in previous years, then the company will have surplus money on account, which shareholders can take out later. This could result in them taking more dividends than the company made in profit.
If this happens once, lenders are not too worried. When it happens more than once, it means that you are eating into the company’s assets and that is a red flag for mortgage lenders.
As a result, some lenders would use the profit figure instead of the dividends, because the profit was lower, and they would assess the mortgage more cautiously.
Tip 6 – Repay any Covid loans
During the pandemic, the government introduced various financial means to help businesses.
You could receive Covid grants without means testing or sending your employees on furlough with the government’s help. Last year, lenders took a rather grim view of people receiving these grants or if someone was on furlough, which led to limited mortgage options as reported by BBC. This period is behind us now.
Covid-related loans, on the other hand, will still influence your options for getting a mortgage as a company director.
Most lenders would like you to repay any Covid loans prior to applying for a mortgage. If you don’t, it could limit your lender options and the monthly loan repayments will often reduce the income that lenders will use to assess the mortgage.
Consequently, if you can, it is worth repaying any Covid loans in full in order to maximise the mortgage amount you can borrow.
There are various ways to assess your income and getting a mortgage as a company director is definitely feasible.
In order to get bespoke advice and to make the most of your situation, it is best to speak to a whole of market mortgage broker. A whole of market broker has access to over 100 lenders and will be able to get you the best mortgage deal based on your circumstances.