A Limited company director mortgage is simply a mortgage for a client who is a Limited company director
Considerations when applying for a limited company director mortgage
How long have you been trading for?
Mortgage with less than one years accounts
Its nigh impossible to get a mortgage with less than one years accounts. The reason being without a year’s accounts lenders will not be able to verify your income so they will not be able to responsibly lend.
Mortgage with one years accounts
If you have been trading for between 1 and 2 years you will have at least one years limited company accounts. The time that you start the business may not coincide with the personal tax year of April to April. To maximise the lenders available it is important to file both your limited company accounts with company house AND your personal tax return as soon as possible. Try not to wait the full 9 months after year end in respect of the limited company accounts or until the end of January after the tax year.
No official accounts = No way of proving income = No mortgage
Mortgage with two year accounts or more
If you have two years accounts then most lenders will consider your application. If you have 3 or more then pretty much all will.
What income will be considered?
PAYE
If you receive PAYE (pay as you earn) payments from your limited company, the mortgage lender will consider the gross (before tax) level as income for mortgage purposes.
Many limited company directors are advised by their accountants, to take a minimum level of PAYE income. Enough to cover the minimum national insurance contributions required to receive benefits and a state pension but not enough to actually pay employee or employer national insurance contributions. In 2021 this figure is circa £9,500. This figure should appear on your tax calculation as employment
If you own less than 25% ( some lenders 20%) of the limited company you will generally be considered like an employee on PAYE only
Dividends
After utilising PAYE tax advantages most limited company directors are then renumerated by dividends. These are a pro rata payment typically quarterly or annually to the shareholders of the company. Limited Company Directors typically being the main shareholders as well in smaller limited companies.
As Dividends are subject to income tax, they are taken into account by lenders as part of a company directors income.
The amount considered by the mortgage lender will be the amount declared on your Tax Calculation under – Dividends and other qualifying distributions
from UK companies. Dividends are generally paid AFTER corporation tax of the company so this can affect your affordability.
How is limited company director mortgage income calculated?
Most High St lenders work on the proviso of
PAYE income + Dividends = INCOME ( providing dividends do not exceed net profit after tax of business)
Ie £9,500 PAYE + £23,000 Dividends = £32,500
Many will take the last years accounting figures as long as steady or rising others will average over 2 – 3 years. If the last figure is decreasing , then the last year generally the only one considered
PAYE plus share of Net profits
Some lenders take the pragmatic approach that because a Director / Shareholder could vote all the net profit as dividends that they will use that figure rather than the amount taken as dividend. Some will consider the net profit figure BEFORE corporation tax. Though there are even more stringent criteria
Example
Company Director owns 50% of ABC Ltd
She pays herself £9,500 per annum via PAYE
The company has Net Profits after tax of £120,000 . This could in theory all be nominated for dividends and our company director could receive £60,000 ( 50%) as dividend income.
Our company director doesn’t wants to take all the net profit as a) she want to expand the business and use the extra for investment in the business and b) she doesn’t really want to pay higher rate tax so her and the other shareholders nominate £80,000 in dividends ( her share would then be £40,000)
Most lenders will take our company director mortgage income calculation as
£9,500 PAYE + £40,000 Dividend income = £49,500
Some lenders will however consider
£9,500 PAYE + £60,000 share of net profits = £69,500
This obviously makes a huge difference to potential maximum borrowing. Note however that we have to ensure the payments are still affordable regardless of method taken and you may have to nominate dividends in the future to ensure your mortgage debt is serviceable
How much can I borrow based on income calculated
Typically a multiple of 4.25 – 4.5 times income is achievable subject to affordability, debts, credit score etc
So rough finger in the air on £32,500 you could borrow circa £136,000 – £146,250
You own individual circumstance will be discussed with you and we will look at the best rate vs maximum borrowing for your particular requirements
Money taken from Directors Loan Account
Your accountant may advise that taking back money lent to the company is the most tax efficient way to take money out of the business. Especially in the early years you may have lent the business thousands as seed capital. Once the business can pay you back why wouldn’t you as there would be no personal tax to pay on the director loan repayment.
The issue with this form of renumeration is that the lenders see it the same as HMRC. It is loan repayment not income. There may not be enough funds to pay a Salary or dividend AND the loan and as the director loan repayment is the most tax efficient is recommended by your accountant. So if you choose the repayment unfortunately it will be to the detriment of your mortgage application. Speak to you accountant about your mortgage plans early to make sure they are aware you need to maximise income and are prepared at this stage to pay the tax potentially on personal earnings. The director loan can always be repaid at a later date
There are a handful of more specialist lenders that will consider this form of income but the interest rates will be higher. Better to plan for your mortgage application with your accountant before this is your only option
What documents will we ask for limited company director mortgage?
This will depend on the lender but could be a combination of the following and we would ask for the below to ascertain the best route for your limited company director mortgage
- Latest 2 years Personal Tax Calculations
- Latest 2 years Personal Tax Year Overviews
- Latest 2 years Company Accounts
- Latest Limited Company Confirmation Statement to show shareholding
- Latest 3 months bank statements (personal and business accounts)
Recent incorporation from Self Employed to Limited Company
Unfortunately most Limited company director mortgage lenders will not consider the accounts of the period you were self employed ( as a sole trader / partnership) before you incorporated as technically the limited company is a different legal entity. Speak to your accountant about your mortgage plans before you incorporate.
Once the limited company has been established for 2 years plus it is less of an issue. If you have incorporated and need a limited company director mortgage within the first year you are going to be left with little to no options