Mortgages for Company Directors Explained
How Does the Application Process Differ From a Standard Mortgage?
The main way in which the application process for a company director differs from that of a standard mortgage applicant, is in the calculation of your income. How your income is calculated will change the mortgage options available to you considerably.
When applying for a mortgage as a company director, what is considered income will vary according to what percentage of shares in the company you own. It can also largely depend upon which provider you choose.
How Will Your Income be Calculated?
First of all, the lender will consider what percentage of shares you own in the company. If you own less than 20% of the shares in your company, your personal salary will be used to calculate the mortgage. Your payslips and P60 will usually determine this.
You will be treated as self-employed if you own more than 20% of the shares in your business. This means that in addition to your PAYE salary and dividends you have drawn from the business can also be used in the calculation. In some rare circumstances, specialist lenders may consider your share of the retained profits, as your income.
What Information Will a Lender Need?
The amount of information you need to provide, will vary quite considerably between lenders. Most lenders will require, at the very least, an account certified tax return and/or your SA302 for 12 months worth of trading. It’s highly likely that two or even three year’s worth of accounts will be required by high street lenders.
If you are able to offer more than the minimum requirement of trading records when applying for a mortgage, this will be looked upon favourably. It’s worth bearing in mind, however, that an average will usually be taken of the full period submitted. Therefore if your profits are widely varied, you might benefit from showing a shorter, but more stable history of your accounts.
Some lenders will also need business and personal bank statements for the past three months, in addition to the accounts. Like with any type of mortgage application, you will also need proof of identity and address.
How Much can you Borrow?
Each lender has their own income and affordability criteria in place, which means that the amount you can borrow will vary between lenders. The figure is usually based on between three and a half and five times your income, taking into account any personal risk factors. A short trading history or debt problems will generally reduce the amount of your offer.
The total amount you can borrow may also vary hugely depending on what the lender considers income. For example, a specialist lender may consider your percentage of the net profits as income. It’s easy to see how five times the net business profit is likely to be much larger than five times your PAYE salary.
How do you go About Arranging a Mortgage as a Company Director?
Ideal Home Loans are passionate about helping self-employed people to find a suitable mortgage. Once you have prepared your accounts and considered your options, you can contact them for expert mortgage advice. They can offer advice and guidance at every step throughout your mortgage application.
Any Special Advice for Company Directors?
Finding the right mortgage has the potential to prove most difficult for directors of limited companies. This is due to the large differences in acceptance criteria and calculation methods between providers. For this reason, it’s highly advisable that they seek professional advice from a specialist mortgage broker, prior to application.
As well as being able to find the mortgage products that are most suited to your needs, a mortgage adviser can also gauge your chances of acceptance. They may also have access to deals that are not readily accessible to everyone.
Do Deposit Requirements Differ from a Standard Mortgage?
How much deposit you will need won’t be higher based upon your company director status in isolation. Company directors theoretically have access to the same mortgage products as everyone else. Your individual circumstances, however, will impact the amount of deposit you require.
For example, whilst you may be able to get a mortgage with a lower deposit requirement, having 15-20% will put you in a good position. If you have a shorter trading history or adverse credit, you are likely to be asked for this much as a minimum. It’s also worth knowing that if you take out a high mortgage (£750k+), larger deposits will usually also be needed.