How Just Mortgage Brokers Can Help You
If you run your business as a limited company, it can be difficult to know where to start looking when you want a mortgage. The lending criteria implemented by many of the more mainstream lenders is not particularly geared towards self-employed applicants, and even less so when it comes to the more complex finances of limited company directors – it is a particular irony that sometimes company directors find it more difficult to get a mortgage than the employees whose salaries they pay!
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What are the application criteria for a Mortgage?
Be assured that there absolutely are lenders out there who offer mortgages to limited company directors. A few of the big high-street names are moving in the right direction with regard to this type of lending, but it is typically in the smaller, more niche corners of the lending market that you will find the most flexibility in assessing directors’ income. When you start looking for a mortgage, however, it is important to bear in mind that application criteria can vary quite considerably between different lenders, with regard to factors such as how they will calculate your income figure for the purposes of affordability assessment and working out how much you can borrow.
As a general rule, lenders will expect your company to have been trading for at least a year before you apply for a mortgage. Some lenders may make exceptions for certain professionals (such as doctors) who have been operating as a limited company for less than a year, but this would normally only be considered where a contract can be used as evidence of ongoing and future income.
Lenders will typically want to see your company accounts covering at least one full tax year. It is not uncommon to be asked to provide more than that – two or three years’ worth. In some cases – where your company’s accounting year does not run April to April and therefore your first tax return doesn’t cover a full trading year – lenders may be willing to look at a 12-month “snapshot” of your accounts rather than making you wait until the next tax year end before applying.
Will I have to put down a bigger deposit as a company director?
Being a company director in and of itself does not mean that you will have to put down a larger deposit. In theory, you should have access to mortgage deals with the same maximum loan-to-value (LTV) ratios as any other borrower – typically up to 95% lending in straightforward scenarios, with a larger deposit typically required only in cases with an adverse credit history, or to gain access to more attractively priced mortgage products.
Some more specialist lenders with more flexible lending and assessment criteria may require a larger deposit to be put down; limiting the maximum LTV to, for example, 85% allows them to offset the increased exposure to risk in comparison to more standard mortgage lending. Be aware that it is also common for lenders of all sizes to require larger deposits on larger loan amounts, for example mortgages over £750,000 or £1 million; again, restricting the LTV on large loans allows the lender to mitigate the increased risk.
How will the lender work out my income?
This is the area in which borrowing as a company director perhaps differs most from a mortgage applicant in salaried employment. As a director you are likely to have taken advice from your accountant aimed at maximising tax efficiency – for example retaining profits within the company structure, and splitting money drawn from the company between salary and dividends. Unfortunately, this can be detrimental to your borrowing ability with how many lenders assess your income and in turn affordability.
Lenders with experience in providing mortgages to company directors understand that a company director’s base salary provides an incomplete picture of how profitable that company is. That said, different lenders still vary in how they will calculate your “income”, and this can affect both their affordability assessments and how much you will be allowed to borrow.
The majority of lenders, and particularly more mainstream lenders, will consider only money that you have drawn from the company to be your income. Therefore, most lenders when assessing a mortgage application by a company director will take account of the salary drawn from the company, plus dividends drawn. However, there are some specialist lenders who will instead consider your share of the company’s net profits as your income – this can make a considerable difference in affordability calculation and the maximum loan amount, as we illustrate below.
How much can I borrow?
Lenders usually base the maximum total borrowing on a multiple of your verified income. Income multiples fall broadly in the range of about 3.5 to 5 times income. The exact figure will vary from one lender to the next, and can also vary depending on circumstances – for example, past credit problems may mean a lender will apply a lower multiple, reducing exposure to risk by limiting the lending amount.
Here is an example of how the different methods of working out your income can significantly affect the amount you might be able to borrow. Let us say your share of the company’s net profits are £250,000, but you only draw salary and dividends totalling £50,000. If we assume an income multiplier of 5, then a lender basing your income figure on salary plus dividends would lend a maximum of 5 x £50,000, i.e. £250,000. A specialist lender basing their income figure on share of net profits, on the other hand, would lend a maximum of 5 x £250,000, i.e. £1.25 million.
How do I prove my income as a company director?
Most lenders will ask you to provide full, finalised accounts and/or SA302 year-end tax calculations from HMRC (usually with the corresponding tax year overview). Lenders will usually need your accounts or SA302 covering at least one full tax year, and it is common to ask for two or three year’s worth of accounts or SA302s to build up a full picture of your past, current and likely future income.
Lenders will typically require your accounts to be certified by a qualified accountant. They may also ask for copies of you business and/or personal bank account statements – usually the past three months’ worth – as further verification of your income.
If a lender asks for more than one year’s accounts to verify income, be aware that most will take an average to work out your income figure, rather than the most recent year’s. This can be frustrating if your business has built over the period concerned; however, some more specialist lenders do base their income figures on the most recent year’s results.
How do I get a copy of my SA302?
An SA302 calculation is your year-end tax calculation, provided by HM Revenue & Customs. It shows your declared income from all sources, and breaks down how your income tax and National Insurance contributions are calculated. If you have an accountant, they most likely submit your annual tax return using commercial accounting software, and the SA302, or sometimes referred to as your tax calculation, can be printed off directly.
If you submit your tax return yourself using the HMRC Self Assessment online portal, you can sign into your account and print off up to four years’ worth of SA302s and corresponding tax year overviews. Please be aware that while many lenders (over 50) accept SA302s printed out via the online portal or commercial software, some may ask for HMRC originals.
If the lender asks for original SA302s, if you do not have access to a printer, or if you submit your yearly tax return by post, then you will have to request the documents from HMRC. You can do this by telephone via the Self Assessment helpline on 0300 200 3310, quoting your National Insurance number and Unique Taxpayer Reference (UTR). Alternatively, you can write to: Self Assessment, HM Revenue and Customs, BX9 1AS. Allow up to two weeks for the documents to arrive.
What if I have had credit problems, or declared business losses?
In common with any other mortgage applicant, past credit problems can make it more difficult to get a mortgage. There are lenders who are more flexible in lending to people who have had problems such as late payments, defaults, debt management plans, IVAs, CCJs or bankruptcy; however, you should be aware that you may have to settle for a slightly higher interest rate, or be asked to put down a bigger deposit. Lenders will take into account the seriousness of the debt problems, and how long ago they occurred.
The situation is similar for company directors who have declared a loss in the past three years. Most mainstream high-street lenders are unlikely to approve a mortgage for a limited company director with a recent history of business losses, as this represents an increased risk of future income problems that could result in the mortgage defaulting. As with personal credit problems, however, there are a number of smaller, more specialist lenders in the market who may be more flexible, especially if you can demonstrate that your business has since recovered.
I am a buy-to-let landlord
Will this affect my chances of getting a mortgage?
Recent and forthcoming changes in income tax and corporation tax have meant that more and more buy-to-let landlords are moving their business standing from sole trader to a limited company basis. This helps achieve tax efficiencies but, as mentioned above, can make things more complicated in terms of income verification when applying for a mortgage, particularly if profits are retained in the company structure to reduce tax liabilities.
It might be reasonable to assume that having a large, well-established buy-to-let property portfolio will work in your favour when applying for a new mortgage, whether that is for a new residential property or to expand your portfolio further. However, in today’s market lenders in general are more risk-averse than they might have been in the past, and this can come into play in a number of ways. Many lenders have limits on the total number of mortgages they will allow a borrower to have (across all lenders) – so, for example, if you already have five mortgaged properties, they may not accept an application for a sixth mortgage.
Similarly, some lenders have an absolute mortgage debt cap which they will not exceed – this might apply to debts overall, or just to mortgages with lenders within the same group of companies (e.g. Lloyds Bank, Halifax and Bank of Scotland are all subsidiary companies of Lloyds Banking Group). So, if you already have total mortgage debts of, for example, £2 million this might prevent them from offering any additional lending. This can be frustrating for successful landlords with a large portfolio, but such policies are designed to minimise the lender’s exposure to risk.
Overall, if you are a buy-to-let landlord be prepared to have your property portfolio scrutinised, even if the mortgage you are currently applying for is to purchase a new residential home for yourself. Buy-to-let properties which meet the lender’s standard criteria for rental income are usually considered to be self-financing and effectively ignored in terms of affordability calculations for the new mortgage. However, if any properties are not covering the corresponding mortgage outgoings sufficiently, then this could have an effect on affordability and therefore the amount you will be able to borrow.
How Just Mortgage Brokers can help
At Just Mortgage Brokers we have years of experience in helping limited company directors get mortgages. We understand that this can be quite a niche segment of the mortgage market, and that lenders attitudes and policies can differ from one to the next; we can help you find the lender and the mortgage deal that best match your unique circumstances. Call us today on 0800 114 3753, or use our online contact form, to discuss how we can help.