Limited Company Director Mortgage

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Limited Company Director Mortgage (Part 1)

Chirag Patel explains how the mortgage process works if you are a limited company director. Episode one of two, recorded in October 2024.

How does the mortgage process work for a limited company director?

It’s very similar to a regular mortgage. We complete a mortgage fact find, request the relevant ID, income and credit file – plus deposit documentation if you’re buying a home. We then review our panel of comprehensive lenders, ranging from high street to specialist lenders, and make a tailored recommendation.

Are there any specific mortgage products designed for limited company directors?

Most lenders offer the same products to a limited company director as they do to employed individuals. But there are certain lenders that offer specific self-employed mortgage products designed for this niche.

As an example, as of October 2024, Saffron Building Society has a self-employed mortgage product range, created specifically for clients with one year’s accounts and a projection of future earnings. They also have a product for those with two years’ finalised accounts and a rising trend of more than 25% income, allowing them to use just the latest year’s accounts for affordability.

Do many lenders offer mortgages to limited company directors?

Yes, the vast majority of residential mortgage lenders lend to limited company directors, so there’s plenty of competition for this segment of the market.

What are the eligibility criteria for obtaining a mortgage as a limited company director?

There’s the normal mortgage eligibility, such as being a UK national or, if you’re a foreign national, having the appropriate visa. It also requires a good credit score and sufficient income to pass the lender’s affordability calculator for a mortgage as a company director.

You will also need at least one year’s trading accounts and a projection for the second year, as a minimum. The company must also be a going concern – i.e. it’s expected to continue to operate and meet its financial obligations without threat of liquidation in the foreseeable future.

The business shouldn’t be subject to a CVA – a Company Voluntary Arrangement, where if the company is insolvent, they agree to pay creditors over a fixed period of time to avoid bankruptcy. It’s like an IVA for business.

What documents are typically required when applying for a mortgage as a limited company director?

We would need to see your ID, bank statements (personal and business) and your credit file to check your commitments and credit conduct.

We normally complete a full fact find, which mirrors the lender’s application and helps establish things like expenditure and financial dependents, which are needed for lending calculators. We also need proof of deposit if you’re buying a property.

Specifically for a limited company director, we ideally need the latest one to three years’ accounts – although some lenders will work from one year with projections. We also request the latest two to three years’ tax computations and tax year overviews.

How do lenders assess the income for limited company director mortgages?

The most common way is to look at the director’s average salary and dividends over the last two years, unless the latest year is lower – in which case that year will be used.

A smaller set of lenders can consider the latest two to three years director’s salary and net profits after tax and take an average. Again, if the latest year is lower, that year will be used.

An even smaller set of lenders may take an average of two to three years director’s salary and net profits before tax. If the latest year is lower, again that year is used.

Lenders can take a company’s retained profits into account because they know the clients could have taken these profits as dividends but chose not to. Therefore, their incomes could have been higher, compared to the standard salary and dividends.

How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?

Lenders decide their appetite for risk and which market that they’d like to aim for and implement that in their affordability calculator models.

Therefore, traditional lenders prefer the dividends route as it demonstrates the actual income the client took out of the business, that’s been taxed with HMRC.

A smaller niche of lenders consider retained profits, as they perceive that the clients have been conservative by not maximising their income – they did not draw all the retained profits as dividends.

Can I still get a mortgage if I have a limited trading history as a company director?

Most lenders prefer at least three years’ trading and two years’ finalised accounts, but small niche lenders will be able to do more bespoke underwriting based on one year’s accounts and the projection for the second year.

Normally the projections are provided by an accountant, who will want to see at least 18 months’ trading history and future invoices.

Are there any advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?

For a sole trader, business profits and personal income are one and the same. The client is taxed on their full profits, which makes it easy for a lender to calculate income. The majority of lenders therefore operate this way, and you will have the widest pool of lenders, which is an advantage to a sole trader.

The disadvantage is that sole traders can’t utilise tax savings by only drawing out the income they need and utilising the fact that lenders can count on retained profits as earnings as an alternative.

The advantage for a company director is that they can be tax efficient by not drawing all their profits as income through dividends and being taxed on them. They only take the income they require. But the retained profit can be considered as income by lenders operating in that self-employed space.

However, the disadvantage is that you have a smaller pool of lenders using retained profits. The majority of the lenders still rely on direct salary and dividends to validate income for limited company directors.

Are there any restrictions or limitations on the types of properties that can be purchased with a mortgage as a limited company director?

No, it’s very similar to a mortgage as an employed individual. The property is independently assessed by the lender’s nominated surveyor, to ensure that it’s adequate security and meets their underwriting guidelines as suitable construction.

Sometimes homes may be built with very old building methods or a type of construction that the lender doesn’t have the appetite to take on. But that’s individual to each lender and it’s not affected by it being a limited company director mortgage.

Do you have anything else to add before we return for part two?

I just wanted to emphasise that for limited company directors, it’s really important to keep all your business and personal tax affairs up to date.

You need to keep the relevant income and expenditure documents to enable accountants to produce the accounts efficiently. This is important, because most lenders won’t accept accounts and tax documents for the latest personal income if they’re over 18 months old.

We’ve recently had a few clients where the lenders have required those documents, even though Companies House wouldn’t need them for several more months. It’s just something that is helpful in this environment.

Chirag Patel trading as CKN Mortgages is an Appointed Representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority.

Your home/property may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.

There may be a fee for mortgage advice. The precise amount will depend upon your circumstances, but we estimate it will be £499.

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Limited Company Director Mortgage (Part 2)

Continuing the conversation on mortgages for limited company directors with Chirag Patel. Episode two of two, recorded in October 2024

Can I use my limited company profits or assets to support my mortgage application?

Yes. Although most lenders don’t, a small proportion of lenders will use net profits before and after tax as allowable income, based on the latest two to three years’ accounts.

An even smaller pool of lenders operating in the High Net Worth lending market can consider assets to support the mortgage application.

The Financial Conduct Authority (FCA), the industry regulator, defines a high net worth individual as someone with an annual net income of at least £300,000 or net assets of at least £3 million – or whose obligations are guaranteed by a person with an income or assets of such an amount.

Are there any tax implications or considerations for limited company directors obtaining a mortgage?

Limited company directors pay corporation tax on profits. When they take a salary and/or dividends for personal income, they will usually incur additional tax, dependent on their circumstances.

Most lenders use salary and dividends to verify limited company director income. However, with a lender that uses retained profits in the business, instead of dividends, clients can potentially reduce their tax bill and achieve the same level of borrowing. This has to be weighed up against the mortgage rate, as it’s a smaller pool of lenders.

How can I improve my chances of getting approved for a mortgage as a limited company director?

Ideally, the following specific factors will help limited company directors:

The business has been trading profitably for at least three years, ideally on an upward trend
Two years minimum accounts being available
The business is expected to continue to operate and meet its financial obligations without threat of liquidation in the foreseeable future.
The business is not subject to a Company Voluntary Arrangement, where a company is insolvent and agrees to pay creditors over a fixed period of time to avoid bankruptcy.
Not being over indebted.
Making sure all business and personal taxes are paid on time.

Other than that, it’s just the usual factors: a good credit profile – ideally without adverse credit and not being over indebted against the income you receive – and having the minimum level of deposit for the mortgage you require.

What are the typical interest rates and repayment terms for limited company director mortgages?

This is dependent on a number of factors, including the client’s age, retirement, deposit amount, Loan to Value ratio, loan size and credit profile.

It also varies depending on whether they want an interest only or repayment mortgage, and whether the lender assesses their income based on dividends or retained profits. There isn’t really a typical interest rate or a repayment term. It’s very bespoke.

Can I use a limited company director mortgage to purchase a Buy to Let property?

Absolutely. You can purchase the Buy to Let property in your personal name or in a limited company name.

If you’re looking to set up a limited company Buy to Let mortgage, you’ll need evidence that it’s set up with the appropriate SIC code, the ‘Standard Industrial cClassification.’ That ensures the business is permitted to operate in the lettings business market.

How does being a guarantor for another person’s mortgage affect my own eligibility as a limited company director?

Guarantors are very rare in the mortgage space these days. But if you do act as a guarantor, the lender will take the full mortgage commitment costs into account, because as a guarantor, you are liable for that.

That will affect your borrowing capacity as it will be included in the affordability calculations, just like any other credit commitment.

Can I remortgage a property as a limited company director? What are the potential benefits?

You can do this in the same way as a non-limited company director. There may be potential tax benefits if the property is a Buy to Let purchased through a limited company vehicle versus your own personal name, but it’s important to clarify this with a tax expert.

What happens to the limited company if I’m unable to make mortgage payments on time?

No lender wants to repossess someone’s home. Repossession is only done as a last resort or if it’s in the financial interests of the borrower.

For this reason, lenders have an extensive range of measures to use with clients experiencing difficulties. They use these in conjunction with new measures agreed by the signatories of the Mortgage Charter, a government initiative that most lenders have signed up to. The Charter supports borrowers concerned about high mortgage costs and rates, to try and keep them in their homes.

Can I transfer an existing mortgage held personally to a limited company if I become a company director?

Yes, you can do this, but it’s important to speak to a tax expert as there may be other costs to consider outside of mortgage savings, such as capital gains tax. Talk to a tax expert for advice before making any decisions.

Are there any additional costs or fees associated with obtaining a mortgage as a limited company director?

For residential mortgages, the costs are not dissimilar to employed applicant mortgage options, because the majority of lenders don’t set different rates for the self-employed and employed.

But for Buy to Let mortgages where the mortgage is set up as a limited company, lending is normally provided by private banks with the capacity to do individual underwriting. Because they’re private banks, their cost of borrowing is higher than a retail bank. It’s therefore likely to be higher in fees and rates compared to a Buy to Let mortgage in personal name.

How can a mortgage broker help with mortgages for limited company directors?

This is a really complicated area. I’m a self-employed business owner myself, so I know how busy self-employed individuals are.

It really is beneficial to speak to a mortgage broker because they will have experience of dealing with a broad range of self-employed clients and situations. We can use our extensive experience and knowledge of the market to help you find a suitable mortgage option.

I strongly recommend you take advantage of our access to a comprehensive range of lenders, both from the high street and specialist lenders. Many are only available to brokers and often offer us exclusive rates too.