A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
There could be a prevailing assumption that obtaining mortgages for directors is a straightforward endeavour. However, reality unveils itself as a nuanced challenge. The process of securing a mortgage as a company director is intricately nuanced, demanding a precise understanding and thorough preparation. But with the right understanding and preparation, it is certainly achievable.
In this guide, we’ll delve into the intricacies of how company directors can navigate the mortgage application process in the UK, exploring eligibility criteria, the borrowing process, and the evidence of earnings required.
Understanding the Basics
Securing a mortgage as a company director involves navigating a specific set of considerations and procedures. In the following sections, we will learn the essential aspects that company directors need to understand when embarking on the journey to secure a mortgage:
A. Eligibility Criteria
Company directors, like any other individuals, must meet certain eligibility criteria to qualify for a mortgage. Lenders typically consider factors such as credit history, income stability, and the ability to make repayments. As a company director, you need to demonstrate a reliable income stream and a good credit score to enhance the eligibility.
B. How It Works
The mortgage application process for company directors follows a similar path to that of standard applicants. Directors will need to provide documentation supporting their financial standing and prove their ability to meet mortgage repayments. The lender will assess the applicant’s risk profile before deciding on the mortgage amount and terms.
C. Borrowing Amount
The amount a company director can borrow depends on various factors, including their income, credit history, and the lender’s policies. Lenders typically assess the affordability of the mortgage by considering the director’s income and outgoings. The higher the income and lower the liabilities, the more likely it is for a director to secure a larger mortgage.
How Do Mortgages Work For Company Directors?
When it comes to company director mortgages, financial institutions evaluate the director’s income by considering elements such as salary, dividends, and a portion of the net profit.
Accountants commonly advise directors to receive a base salary up to the tax-free threshold, and then to draw dividends for any additional income. This strategy allows profit to be retained within the business, which may be necessary for sustaining the company and reducing tax liabilities. However, a notable drawback is that most lenders typically only take into account the income withdrawn from the business.
For instance, if your company generated a profit of £100,000, but you only withdraw £20,000 through a combination of salary and dividends, mainstream lenders would base their assessment on the £20,000. In this scenario, the substantial company profit of £100,000 becomes irrelevant. This discrepancy often leads to challenges for directors when dealing with mainstream lenders, despite their ability to comfortably repay a mortgage.
In situations akin to this, Your Mortgage Expert can offer assistance, since we collaborate with specialist lenders who adopt a distinct approach to income assessment compared to mainstream lenders, ensuring that you secure the maximum mortgage available.
What Are The Evidence of Earnings You Will Need?
1. Company Accounts
Lenders often request several years’ worth of company accounts to assess the financial health of the business. Directors should ensure that these accounts accurately reflect their income, as lenders use this information to determine the mortgage amount they can afford.
2. Tax Returns
The presentation of personal tax returns, notably the SA302 form, holds significant weight in showcasing a director’s income. These documents offer a comprehensive breakdown of personal earnings, encompassing salary, dividends, and additional revenue streams. Lenders commonly request SA302 forms spanning the past two to three years.
Directors drawing a salary from their company can utilise payslips as proof of income. Typically, lenders seek several months’ worth of payslips to gauge the consistency and reliability of this income stream.
Many company directors receive income through dividends. Lenders consider the consistency and amount of dividends when assessing mortgage applications. It’s essential to have a clear record of dividend payments over the preceding years.
How does the duration of trading history impact mortgage eligibility?
A. 0 – 1 years
During the initial period of 0 to 1 year, the majority of lenders are hesitant to offer a mortgage. However, a few may consider it under specific circumstances, such as having evidence of future income through a contract or if the business has transitioned from a sole trader to a Limited Company for tax purposes.
B. 1 – 2 years
With a trading history of at least 12 months, the options for potential lenders increase. However, some lenders may require a complete 2 years of trading before considering the mortgage application.
C. 2 – 3 years
For Limited Company Directors with a trading history spanning 2 to 3 years, the outlook improves significantly. During this period, the majority of lenders are likely to be open to extending a mortgage, contingent upon successful credit checks and meeting other eligibility criteria.
Seek For A Professional Help!
Navigating the intricacies of mortgage applications for company directors requires a nuanced understanding of income assessment practices. By working with Your Mortgage Expert, you can overcome the challenges associated with mainstream lenders, ensuring that your mortgage application reflects your true financial standing and potential repayment capacity.
If you find yourself navigating the nuances of particular financial scenarios, hesitate no more. Our seasoned consultants at Your Mortgage Expert are dedicated to crafting the perfect solutions tailored to your individual needs!
Can I get a mortgage if my company is newly established?
Yes, it is possible, but lenders might be more cautious. Having a solid business plan, a strong personal credit history, and evidence of future income projections can enhance your chances.
Do lenders consider bonuses and other perks as part of my income?
Some lenders may consider bonuses and perks as part of your income, but they often prefer stable and guaranteed income sources. It's essential to provide clear documentation of such additional income.
How does being a sole director vs. a director in a partnership affect my mortgage application?
Both types of directors can secure mortgages, but lenders might assess the financial stability of the business differently. Sole directors may need to provide additional documentation to prove the viability of their business.
What if my company has irregular income?
If your company's income fluctuates, providing a clear explanation of the reasons behind the irregularities and demonstrating a stable financial outlook can help ease lender concerns.
Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.