As a company director you may be aware of how difficult it can sometimes be to acquire a mortgage as opposed to someone in conventional employment. Sadly, a large number of mainstream lenders do not cater as well as they could do for many business owners or others who may be categorised as ‘self-employed’.
The irony is that the lending risk for people who run companies or work for themselves is often less than someone on PAYE. A company director will often gain their income from multiple clients or customers, which provides instant diversification of income. By contrast, people in conventional employment are most likely to be 100% reliant on the one company and job, therefore increasing the risk of loss of income should that job be lost or come to an end.
More often that not when company directors and business owners do manage to find a lender willing to offer them a mortgage they find it difficult to optain one reflective of their true financial position and affordability – therefore limiting the amount of properties available to them.
The problem lies in the fact that most limited company directors draw what they need to live on in the form of a salary (generally around £8k pa) and dividends. The true earnings are often much higher but rather than immediately drawing it down as salary it remains in the bank for cash flow reasons, either to reinvest or for the future.
The majority of lenders will lend purely based on the individuals actual declared income (as above, a mixture of salary and dividends). This however does not reflect the money they earn but leave in the company — in effect, their unpaid earnings. So for example; a company director paying themselves an annual salary and dividends amounting to circa £50,000 will be able to borrow around £240,000 using standard affordability calculations. If they wanted to borrow around £400,000 there is obviously an issue.
However, there are lenders that will base their underwriting decisions on the share of the net profits that company directors have in their business. So rather than look purely at the salary and dividends that have been paid, they will look at the larger income being generated by the business, which will include money left in the bank, making the net profit of the company director in the example above potentially £95,000 — a full £45,000 more than the income standard mortgage lenders would normally take into account. We are now in a position to find a mortgage of around £445,000.
Crucially, this approach means company directors who are looking for a more expensive property do not have to draw extra funds out of their business and pay large amounts of tax on it – rather, just proving it to the lender in their annual accounts.
For company directors who pay themselves less than they are worth, being aware that there are lenders who will base their decisions on net profits rather than declared income is a useful thing to know. At One 77 we are specialists in sourcing mortgages for company directors, with whole of market access and fee free advice.
To discuss your mortgage requirements with an adviser today please call 01249 474954 or complete the form below and we will be in contact.