So, you’re a company director and wondering where to look for your next mortgage? You’ve been to your local bank and they’re not very helpful or you’ve been declined? You’re unsure of what the lender policy on income requirements is and why it differs so much across the market?
Company director mortgages do indeed vary from lender-to-lender, as you’ve no doubt already discovered and the challenge is finding a broker who has the correct knowledge and experience, pertinent to you and your business. It might be that your business hasn’t been trading for too long or you’re not entirely sure what should count as income?
Well here at Cheshire Money, we work with a number of different lenders, all suited to different types of mortgage, even if you’ve been trading for under 12 months. Plus, with our in-house specialist advisors trained in all types of mortgage, we know just who to turn to in your hour of need.
In a nutshell, in order to obtain a mortgage, you need to have been trading for a minimum of 12 months. The only exception to this rule is if you’re a doctor. You may be eligible if you can demonstrate evidence of future contracted income.
In an ideal world, you will need a full tax year’s accounts. If you’re trading spans across two tax years, then it may be possible to find a lender who will consider a rolling 12 months’ viewpoint as opposed to waiting for you to complete a second year of accounts before applying. As covered later on, many lenders will not support your application if you don’t have and can’t prove three years’ trading records. Most won’t even consider your application. Talk to us at Cheshire Money, we have the means and ability to help.
If you are in receipt of PAYE (pay as you earn) payments from your limited company, your mortgage lender considers the level of your payments based on the gross (before tax) as income. Your accountant may already have advised you to take a minimum level of PAYE and most of your income in dividends. However, this is where complications can arise.
Simply put, Dividends are a portion of a limited companies’ profits paid to shareholders by the company on the advice of the Board. In smaller limited companies, the ‘Board’ are generally the shareholders thus dividends are a way of paying directors an income from the business. Subject to income tax, dividends will be considered part of the Director’s income by most (but not all) mortgage lenders.
This is a tricky one. If a limited company makes profit, which is not taken by the shareholders as dividends, this is known as retained profit – because it is retained within the business. Mortgage lenders are not keen on using retained profit as part of the mortgage application by a company director. Their viewpoint being that the retained profit which hasn’t been declared as a dividend, could easily be used by the business for other purposes should they have a bad trading period thus making it not always available to the director or shareholder as income.
Mortgage Underwriting and Retained Profit.
Some mortgage lenders will consider PAYE, dividends and retained profit when underwriting a mortgage. But, each lender’s approach to this differs. Some lenders will consider retained profit BEFORE tax, which would clearly be the best approach, but is quite rare. The majority consider retained profit AFTER tax, which can leave a shortfall of up to 29% in your useable income.
Proving your income.
Generally speaking, as a limited company, you will employ the services of an accountant. As such, lenders can obtain what they require to underwrite your mortgage from your accountant. Your mortgage lender will usually ask for the last three years’ accounts for your business and sometimes they will work on a reference or letter from your accountant. If the latter is used, your accountant will need to provide the information on what is known as an ‘accountant’s certificate’. This will require any details of PAYE and dividends received, demonstrating figures covering the last three years’ trading.
Even though a mortgage lender may not consider retained profit when underwriting, it will still need assurance that the level of dividend received by the applicant can continue to be supported by profit from the business. But be warned! Alarm bells will ring if the lender sees a trend of falling profits thus affecting your ability to achieve a mortgage offer. Many lenders will not support your application if you don’t have and can’t prove three years’ trading records. Most won’t even consider your application.
Fluctuating Profit and Income.
In all businesses, profit can vary from year to year. Unfortunately, varying profit and income can mean complications for your application. If for any reason there is a dip in profits, then this will need to be explained and handled in the correct manner. Equally, a distinct and marked rise in profits can sometimes be more of a hindrance than a help. Therefore, for this reason, many lenders will take an average over the two to three-year period when they are calculating assessable income. Not always ideal for the applicant.
Company owners looking for a mortgage will be treated in the same way as any other borrower, in terms of the deposit required, which is usually up to 95% loan to value (LTV). As with all things, circumstances may change the criteria, for example, if you have adverse credit and depending on what the issues were and how recent. If you have a 15% deposit, then you can be assured that you will have access to the majority of specialist lenders.