Call our Company Director/Limited Company mortgage specialists on 01249 474954
As a company director, we are aware that getting a mortgage is harder for you than it is for those applicants in standard employment.
Sadly, a lot of mainstream lenders simply do not cater as well as they could do for business owners, or other people who are categorised as self-employed or contractors.
The irony is that those who run companies or work for themselves can be less of a risk than someone on PAYE – a company director will often derive an income from multiple clients or customers, thereby providing instant diversification. However, someone who is employed will be completely reliant on their job with the one company. A situation that is arguably a lot more ‘geared’ as they could lose that job tomorrow for different reasons.
What invariably occurs when business owners do find a lender willing to offer them a mortgage is that they will not get a mortgage offer that reflects their true financial position. This can then limit them in the number and cost of properties they want to buy. Let’s look at why this happens.
Most directors only draw what they need to live on
As many will know first-hand, most limited company directors will only draw what they need to live on. This is generally done in the form of a salary and dividends – with the salary component being usually around £8,000 for tax purposes. True earnings are often a lot higher but this is not taken into account as they will not take all the money they earn from their business. Instead, sizeable amounts are left in the bank for cash flow purposes, for either reinvestment or for unforeseen circumstances.
The problem lies in that the majority of lenders will only lend based on the actual declared income that a company director will pay themselves – again using the combination of salary and dividend. The problem with this again is that this does not reflect the amount they earn but choose to leave in the company — their “unpaid earnings” for want of a better term.
As an example…
A company director pays herself an annual salary and dividends which amount to £50,000. The majority of lenders will apply a standard affordability calculation to this. Typically this will enable her to borrow circa £240,000. Not an insignificant amount, though in this scenario they would not be able to borrow £400,000 – even though their true earnings would allow them to in terms of their affordability.
Focusing on net profits
Thankfully, this scenario can be averted. There are lenders, that a small number of brokers can access, that will base their underwriting decisions on the share of the net profits that a company director has in their business. Put simply, rather than look purely at the salary and dividends combination they have paid themselves, they will take into account the real money being generated by the business – including the money which has been left in it. Therefore making a huge difference in the lending amounts available.
Given that the net profit of the company director in the above example may be actually be £95,000 — therefore £45,000 more than the income which she paid herself. In this scenario, a lender that is prepared to look at net profits will lend the company director in the region of £446,000. Over £200,000 more than the original amount.
More importantly, this kind of approach to lending means company directors who are looking at more expensive properties do not have to draw the extra funds out of their business and therefore pay large amounts of tax on it. Rather, they can simply prove the available finances to the lender via their annual accounts.
Though One 77 do not endorse people take out loans bigger than they are comfortable with, for company directors who pay themselves less than they are worth, being aware that some lenders will base their decisions on net profits rather than declared income is a useful thing to know. If this is a situation you find yourself in and would like more information about the process of acquiring a larger mortgage based on net profits then give us a call and we will be happy to help.