Securing a mortgage can be a complicated process for anyone, but for limited company directors, there can be an extra layer of complexity. With income often comprised of both salary and dividends, proving affordability to lenders may require additional steps. In this article, we will explore the landscape of mortgages for limited company directors, providing insights into the process and offering tips for successful applications.
Understanding the challenges
Being a director of a limited company often entails a unique financial situation, a scenario that can complicate the mortgage application process. In addition to dividend payments, directors typically receive a modest salary from their companies. While this setup can be a tax-efficient way to manage personal finances, it may prove confusing to mortgage lenders accustomed to dealing with straightforward salaried incomes.
Mortgage lenders base their decisions on the borrower’s ability to afford repayments. Traditionally, they base the sum they’re willing to lend on the applicant’s income. If the majority of your earnings come from dividends rather than salary, this could significantly limit your borrowing capacity.
However, the mortgage market has evolved, and many lenders are more accommodating of the financial structures associated with limited company directors. They often consider both salary and dividends when assessing affordability, and some might even take retained profits within your company into account.
What mortgage lenders seek from limited company directors
When assessing mortgage applications from limited company directors, lenders typically examine:
Income: This includes salary, dividends, and sometimes retained company profits. Applicants should be prepared to provide evidence of these earnings through company accounts or tax returns.
Trading history: Most lenders require at least two years of trading history for mortgages for limited company directors, though some may require three. The longer your successful trading history, the more favourably lenders will view your application.
Company type: Lenders may distinguish between directors of trading limited companies and those of investment or property companies, as the income from the latter can be more unpredictable.
Credit history: Regardless of your employment status, a good credit score will significantly improve your mortgage prospects.
Strategies for securing a mortgage for limited company directors
Here are some strategies that can increase the likelihood of a successful mortgage application for limited company directors:
Engage a specialist broker: Given the intricacies involved, working with a mortgage broker experienced in helping limited company directors can be a significant advantage. They can guide you towards lenders more likely to approve your application and help secure the most competitive rates.
Maintain comprehensive and transparent records: This includes your personal tax returns and your company’s accounts. Transparent, well-kept records will enable lenders to comprehend your financial situation more easily.
Consider a realistic salary: While a low salary and high dividends can be tax-efficient, this can limit your mortgage options. If you’re considering a mortgage, you might want to think about drawing a higher salary.
Boost your credit score: Pay off existing debts, ensure you’re registered on the electoral roll, and avoid applying for too much new credit at once.
Securing a mortgage as a limited company director can be more complex than for a standard employee, but it’s by no means impossible. By understanding how lenders assess your income and being prepared with clear records and a good credit score, you can navigate the mortgage process successfully. Working with a specialist broker can also make the process smoother and increase your chances of getting a good deal.