Starting or managing a business can be the peak of career satisfaction. But it can also mean a more complex mortgage process. The situation of every business owners and directors is different so there is no one-size-fits-all solution to getting the best in company director mortgages. Finding the right advice is vital to ensure you get the best possible deal.
Summary – what you need
- Trading history – You will usually need to have been a company director for a certain period of time. That’s usually at least 2-3 years, but less can be possible.
- Credit score – You will usually need to have an adequate credit score. Lenders will check your credit history, looking for issues such as any outstanding debts or defaults. But again there are some circumstances and lenders who are exceptions.
- Proof of income– This is the key issue for company director mortgages. You’ll need your tax returns, payslips and financial records, and depending on circumstances, your company’s financial statements. Make sure you’re aware of the proof needed.
- Deposit – You’ll, typically need to provide at least 5-10% of the property’s value. With a 15-30% deposit you’ll get the best terms.
- Specialist broker – Company directors vary enormously in their characteristics. The approach to lenders and mortgage process has to match those differences. A specialist broker will help you do just that..
Why are company director mortgages more difficult?
The main issue is almost always a more variable or complex income than that of a contracted employee. That complexity means lenders assess the income, and the affordability of limited company director mortgages, using different methods. These can vary widely from one lender to another. So it’s key to find the one that suits you best and prepare supporting documents to back it.
To avoid frustration, it’s important to accept in advance that the process can be more demanding. Getting a mortgage for business owners requires more paperwork and proof than other types of self-employed mortgage.
Company directors and business owners often draw their income from a number of sources:
- A direct salary is most straightforward but any director will sometimes forgo payments to help the business. This has been particularly true over the last few years of pandemic and downturn.
- Bonuses are an important part of income. It makes sense for owners to use bonuses to reflect their contribution to business successes
- Dividends are now taxed more stringently. But it still makes good business and tax sense to pay out with dividends in many cases
- Company income and profits are used by some more enlightened lenders as a better estimate of income. Although this depends on the director’s shareholding and control of the business. Understanding and proving this to the lender is often key.
How do mortgages for company directors work?
Despite the extra complexities, company director mortgages still have much the same process as any other mortgage application. Success is down to showing you fall within the lender’s risk profile. They’ll want to know that you can genuinely afford the interest and capital repayments.
The challenge is that many lenders, particularly the well-know high street brands, can be conservative. They measure income more stringently for their affordability and eligibility tests. They would say that’s because they’re prudent and risk-averse. But it’s intensely frustrating when they reject you for a loan that you know you can afford. In truth, outdated processes, and a gold-plated adoption of regulation, cause many of them to ignore income streams that they should include.
Fortunately, with the right preparation of data and the right mortgage broker, we can find you plenty of appropriate specialist lenders. They will calculate and value your income correctly. And in so doing, we’ll ensure you dramatically improve your chances and achieve the company director mortgage you’re entitled to.
Eligibility varies meaningfully from one lender to another and remember these are not black or white rules. If you don’t fit the criteria in one area then we are often able to help. We’ll suggest alternative lenders who are much more accommodating with company director mortgages. We can also sometimes suggest different structures and products.
The general guidelines are:
- Deposit You will need at least a 5% deposit. The maximum mortgage loan-to-value (LTV) off any lender is 95%. A deposit of 15-30% will help give you access to more products, lenders, better terms and lower rates. A higher deposit is often necessary if your credit score is weaker or your company has a limited trading history.
- Credit score – Lenders will check your credit score. You should be ready to fix or explain any negatives. In general, the longer ago it was that they occurred, the better. Equally major issues such as past personal bankruptcy or even County Court Judgements will cause more concern. A few late payments or even a default re easier to deal with. Bad credit mortgages are available to company directors but it may mean less choice and higher rates.
- The right property– Lenders always prefer properties that they can value easily and know will maintain their value. So houses or flats with a standard stone or brick construction are straightforward. Wooden construction or self-builds or unusual designs can take more work and explanation,
- Company age – Most lenders prefer to see a reasonable trading history, often three years or more but some will be satisfied with less and we describe the alternatives in the section below.
Every mortgage lender has different eligibility criteria and the search to satisfy them can seem frustrating. But an expert broker will help you navigate the maze more quickly and with less pain. Even if a lender you’ve approached has rejected you, we may be able to suggest better and easier alternatives.
Company trading history
Lenders love steady years of reliable income and profit. They see that as a strong indication of sufficient income to cover your outgoings, particularly your mortgage interest and capital repayments.
2 – 3 years – almost all lenders will regard you as eligible for a loan. Of course subject to credit and income checks, as well as other eligibility criteria.
1 – 2 years – at least 12 months of trading history makes the process much easier. 2 years of history ensures that an even wider pool of lenders is available
< 1 year – can be a major challenge. Most lenders will turn you down but there can be exceptions. For example, if you have proof of future guaranteed contracted income, or if you’ve recently changed your business from a sole trader to a Limited Company for reasons of tax or expansion.
How lenders calculate affordability for a company director mortgage.
- History – Some lenders will average two or three years of your income. Others will just look at the most recent year.
- Multiples– You should be able to borrow around 4.5 times your annual income, sometimes more. Lenders vary in the range of the multiples they offer. Some will insist on lower multiples for income that they regard as less secure, more complex or unconnected to your main employment.
- Dividends – Many company directors will, quite legally and properly, take a salary up to the tax-free threshold. Then pay themselves the remainder as dividends. Accountants will give just this advice for tax reasons but it can cause complications when applying for a mortgage. Most high street lenders will allow only the portion of your income earned under PAYE as your total annual income. Specialist lenders can be more enlightened and as ever the right advice will get you in front of them.
- Expenses – similarly and entirely legally your accountant may have advised you that some personal and household expenses are allowable as expense claims against your company. This helps reduce your personal tax bill but also lowers your headline income. Again that lower income will reduce the affordability estimates of most lenders. If you’re contemplating a mortgage then speak to you accountant and broker about the cost-benefit of such deductions. The more PAYE and dividend income you can declare, the easier it is to prove affordability.
- Retained earnings – Most lenders only value your salary and dividends for the purposes of affordability. Some specialist lenders will however allow a portion of them for affordability calculations. They’ll only do so if you own more than 20% of the company. That can make a dramatic difference to the amount you can borrow.
Paperwork and preparation
If you can tick these three boxes in your preparation then you’ll maximise your chances of approval:
- Company financials – You will need up to three years of company accounts, usually certified by an accountant. Also SA302 forms, which you can download from your HMRC account and your most recent three business bank statements. Being able to show a steady income is vital. So try not to make any significant investment, or incur any major expense in the period before a mortgage application.
- Personal financials – Make sure your personal bank account and any credit commitments are in good order. Discuss withdrawing more cash from your business with your accountant if that improves your personal financial situation. Make sure you have payslips, proof of dividends received and personal bank statements.
- ID – You’ll need to show some ID such as your passport or drivers license. Also proof of address, which can be a utility bill, bank statement, credit card statement or council tax statement. Almost no lenders accept other bills like mobiles or online deliveries as proof.
- Deposit – be ready to show your savings account statement or a letter proving a gifted deposit with supporting statements.
- Credit score – it’s worth checking your credit score before applying and you can do so for free since most services offer one months subscription for free. Try Experian or checkmyfile and make sure the information is up-to-date.
- Speak to a specialist broker – This whole process becomes hugely easier and quicker if you get the best advice. A specialist broker will have the detailed knowledge of the company director mortgage process. They can also offer you access to specialist lenders that deal only via brokers.
Remortgaging as a business owner
If you already have a company director mortgage then the remortgage process will be very similar to before. You might be able to borrow more or decrease the rate you pay, if you’ve improved your earnings or circumstances since your original mortgage was approved.
This may need you to switch lenders or package your application correctly, so make sure you have the right specialist broker help.
If your original mortgage was taken out before you became a company director, the application process is often more complex. For example if you’ve gone from full employment to being the director of your own company. Or if you’ve changed from a sole trader to a limited company which most lenders will view as a new business. That can decrease your averaged income or mean that lenders see you as having too short a trading period. However, the principles of proving eligibility and affordability remains the same.
If you have enough equity in the business and profits, then you can still find mortgage offers wit competitive rate. Find the right expert advice and support to do so.
Finding the right specialist broker
Specialist loans such as limited company director mortgages require specialist support. So find a specialist broker who knows the market and can act as an adviser and advocate. Remember too that many specialist lenders and products are only available via brokers.
They will make your application dramatically smoother and more enjoyable, helping you succeed even if lenders have rejected you before. Their expert knowledge will help identify the right lender, the correct approach, as well as the preparation and information required.
We offer a free broker matching service to find you the expertise and experience to achieve you the best possible mortgage and terms.