Limited company director mortgages: why your lender matters more than your income

Limited company director mortgages can differ by hundreds of thousands of pounds from one lender to the next, mortgage experts told Newspage.

This is because many lenders count only what business owners draw as an income.

However, some lenders, including high street banks, will consider a director's share of company profits, potentially offering greater borrowing capacity.

How much more could the right lender offer a company director?

In one broker case, identifying the right lender more than doubled what a director could borrow.

Toby Quanstrom, Director at Eastbourne-based Quanstrom Financial, commented: "For a company director, the lender matters more than the income.

"I had one client with one year’s accounts who paid himself £35,000 while his company made £200,000. His high street bank offered him and his wife £272,000. We secured the £666,000 he needed, by placing him with the right lender.

“Certain questions decide the outcome. Salary and dividends, or salary plus net profit is the first. Many lenders count only what you draw, while others count your share of company profit.

"A second question is, profit before or after corporation tax? Pre-tax lenders can see up to a third more income.

“Another question is, latest year of accounts or a two-year average? Many lenders take the lower of the two, while some use the latest year alone, which is ideal for a growing business.”

Toby says that an accountant’s projections can also be of use in some circumstances: "AFIN Bank can use 80% of next year’s projected income, backed by bank statements.

"The issue is that most directors never ask these questions. That is where a broker makes the difference.”

Why can a profitable director look like a poor borrower?

A profitable director can look like a poor borrower when a lender counts only the salary and dividends they draw and ignores the profit left in the company, experts said.

Harry Goodliffe, Director at Winchester-based HTG Mortgages, said: "Directors don’t struggle to get a mortgage; they struggle to find the right lender.

"I’m a broker and a landlord with properties held through a limited company, so I see this from both sides.

"The problem is simple: a director takes a modest salary, a few dividends and leaves the rest in the business because the tax rules push them to it; then a high street lender counts salary and dividends alone and decides they can barely afford a flat.

“Plenty of lenders will add retained profit to salary and see the real business. Find the right lender, and the borrowing could be more than a PAYE employee on the same money.”

Nouran Moustafa, Practice Principal at Roxton Wealth, commented: "A company director can run a highly profitable business and still be treated by a mortgage lender as though they're barely earning a living. It's ridiculous.

"Imagine a director taking £12,000 salary and £18,000 dividends while retaining substantial profits in their company. A lender assessing salary and dividends sees £30,000.

“Another considering company profits could recognise considerably more income. Santander typically assesses salary and dividends, while Accord and Coventry can consider company profits, subject to criteria.

“Some lenders accept one year's accounts, while others require two. Declining profits, reduced dividends and director's loans can complicate applications.

"The irony? Accountants help directors save tax, while the wrong mortgage lender can penalise them for doing exactly that.

"The answer isn't necessarily changing how you're paid. It's finding a lender that understands how your business works.”

How do lenders work out income for limited company director mortgages?

Lenders generally use one of two methods: salary plus dividends, or salary plus the director’s share of net profit. The gap between the two can be vast.

Ross Lacey, Director at Rayleigh-based Fairview Financial Management, commented: "Lenders will generally take one of two stances when it comes to working out how much they'll lend to a company director. Salary plus dividends (Halifax, for example), or salary plus net profit after tax (HSBC, for example).

"There are some that would consider either in certain circumstances. The difference in available mortgage borrowing can be vast.

“We've had cases where a couple draw £50k each in salary and dividends from their business, but the available net profit after tax that could have been paid out was well into the £100,000s.

"A lender like Halifax would restrict borrowing to what they actually took, whereas HSBC would base it on what they could have taken.

“However, lenders that take dividends into account will often want to see that the business has made sufficient net profit after tax in the year the dividend has been paid, to cover the dividend.

"We often meet with clients and their accountants before the end of their trading year, and tax year."

Should you change how you pay yourself before applying?

Many directors deliberately take a modest salary, but experts warned against paying themselves more just to fit one lender’s estimate.

Stephen Perkins, Managing Director at Norwich-based Yellow Brick Mortgages, commented: "Company directors can look far less mortgageable on paper than they really are. Many deliberately take a modest salary and dividends while leaving profit in the business, so a lender that only looks at money actually drawn can substantially understate their true earning position.

“The difference between lenders can therefore be enormous. Some assess salary and dividends, while others can use salary plus a director’s share of company profit, which may produce a much higher borrowing figure.

"Directors should not start increasing dividends or changing sensible business decisions purely to make a mortgage application fit one lender’s calculator.

"The better answer is often to find a lender whose criteria properly reflect how the business actually generates income."

David Stirling, Independent Financial Adviser at Belfast-based Mint Wealth, commented: "Company directors can spend years legitimately minimising tax, only to discover they’ve accidentally minimised their mortgage income, too.

"A director might take £15,000 salary and £35,000 dividends while leaving substantial profit in the company. One lender sees £50,000 income; another, such as HSBC, can consider salary plus their share of net profit, potentially producing a very different borrowing figure.

“The mistake is taking a large dividend and potentially a bigger tax bill, simply to satisfy the wrong lender.

"Profit dips and overdrawn director’s loans can also complicate matters. My advice is to speak to a broker before changing remuneration ahead of a mortgage. Sometimes the solution isn’t changing the client’s finances, it’s changing the lender."

How many years’ accounts do you need?

Some lenders will consider one year’s accounts, but two years is more common, experts said.

Andrew Montlake, CEO at London-based Coreco, commented: "Company directors can be penalised because the wrong lender treats tax-efficient remuneration as their full earning power.

"Some lenders assess only salary plus dividends, while others can use salary plus the director’s share of net profit after tax. That difference can transform the borrowing available, depending on shareholding, profit trends and existing commitments.

“Some lenders will consider an applicant with one full year of trading, but two years is more common. Accounts, tax calculations, business bank statements and a clear explanation of unusual figures all help.

"Projections can support the case, but rarely replace a proven track record. The classic mistake is cutting dividends or making a major business decision before applying without checking the mortgage impact.

“Speak to your accountant and broker early, as good tax planning and mortgage planning should work together, not meet for the first time when the application reaches an underwriter."

What should you do if your own bank says no?

With limited company director mortgages, a low first offer from your own bank isn’t the market’s verdict, one broker in the capital said.

Craig Fish, Director at London-based Lodestone Mortgages, commented: "Being a company director doesn’t make you harder to lend to. It just means you need the right lender, because they don’t all read your income the same way.

"Some only count salary plus dividends, so a director on a modest salary who leaves profit in the business for tax reasons can look like they earn a fraction of what they do.

“Others use salary plus your share of the net profit, whether you’ve drawn it or retained it, and that can transform how much you can borrow. A handful will work from one year’s accounts, often with a bigger deposit.

“The mistake I see most is a director going to their own bank first, getting a low figure or a decline and assuming that’s the market. It isn’t.

"Your bank’s answer is one lender’s opinion, not the market’s verdict. In the year before you apply, get your accountant and your broker talking, so the tax planning and the mortgage planning pull in the same direction.

"Your accountant’s job is saving you tax, and often nobody has told them you need to borrow."

Your questions answered

Responses from Toby Quanstrom, Director at Eastbourne-based Quanstrom Financial.

Do lenders use a company’s profit before or after corporation tax?

Most lenders won't use profits at all. Few lenders will use net profit after corporation tax, and even fewer lenders will use net profit before corporation tax. Using a lender who lends based on pre-tax profits can significantly increase your borrowing potential, so it's always worth speaking with a broker to review your options.

Will a lender use my latest year’s accounts or an average of the last two?

This will depend on the lender you are speaking to. Most lenders take an average of the last two years. However, some specialist lenders will work off the latest year. To push this even further, some lenders will even work off a projection for the next financial year, provided your business bank statements back up the predicted profits.

How much deposit does a limited company director need for a mortgage?

A limited company director can get a mortgage with a deposit as low as 5% of the property's value. There are even some schemes available where a lower deposit can be used, as low as 0%, but always speak to a mortgage broker to see what your options are.

Can lenders use a company's profit for affordability?

Yes. Some lenders understand how limited company directors are paid better than others. Many directors pay themselves a tax-efficient salary/dividend of £50,000 per year. However, if that company has profited £200,000 that year, some lenders understand that you could have paid that to yourself if you wanted or had to. This means specialist lenders, and even some high-street lenders, are comfortable using this figure, enabling you to borrow the money you require.

Can a director get a mortgage if the company’s profits fell last year?

Yes. Some lenders will create a bit of a fuss here, but provided you are placed with the right lender, and a reasonable explanation is provided, this is achievable. It is worth pointing out that lenders will only use the latest year's figures, if they are lower than the previous year, rather than taking an average of the last two years.