Getting a Mortgage: For Limited Company Directors

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Home 5 Mortgages 5 Getting a Mortgage: For Limited Company Directors

Getting a Mortgage: For Limited Company Directors

In this blog post, we will explore the definition of a limited company director, the challenges they face, and the eligibility criteria for obtaining a mortgage for a limited company director. So grab a cup of coffee and join us on this informative journey!

Defining a Limited Company Director

Before we dive into the complexities of limited company mortgages, let’s first understand who a limited company director is.

A limited company director is an individual who holds the responsibility for running a company, as defined under the Company’s Act.

To be classified as a limited company director (as far as mortgages are concerned), you typically need to be a major shareholder, usually with a shareholding of over 20%. Your position as a director is reflected on the companies house website, along with your shareholding.

It’s important to draw a distinction between a company director, and someone with the word ‘director’ in their job title. If you do not hold a shareholding in the business, or are a minority shareholder (under 20%) it is likely you will considered by most mortgage lenders as an employee, and the below information will not apply to you.

Understanding your income as a Limited Company Director

Limited company directors typically receive income in two forms:

  • Salary: A regular monthly payment made by the company to the director.
  • Dividends: A share of the company’s profits distributed to the director.

Aside from this, there will inevitably be profit retained within the business. This income could be taken as a salary or dividend, but doing this would trigger a potential tax liability.

While the salary is usually a regular monthly payment, dividends are paid from the net profits of the business

It’s common for limited company directors to receive a modest salary, as advised by their accountants, whilst receiving a more substantial dividend, with some profits also retained within the business. These could be drawn as a salary or dividend at a later date.

Lenders typically consider an average of the last two years’ salary and dividends when assessing affordability.

They may also consider the company’s net profits, particularly if the director has not drawn down all of their profits in dividends.

How is your income determined when you’re looking for a mortgage for a limited company director?

As a limited company director, your income is calculated using the following documents:

  1. Your Tax Calculation / SA302 – these show your income from employment and your income from dividends
  2. Your LTD Co Accounts – these often show directors salary, but will always show company net profits

Eligibility for a mortgage for a limited company director.

Now that we understand the basics of being a limited company director, let’s explore the eligibility criteria for mortgages. As a limited company director, your personal circumstances matter when applying for a mortgage.

Lenders will assess your credit score and credit commitments, focusing on your personal financial situation rather than just the business.

To be eligible for a mortgage, limited company directors must normally meet the following criteria:

  • Pass a credit check: This will assess their personal credit history and repayment history.
  • Demonstrate consistent income: Lenders will typically require two years of consistent income from the limited company.
  • Have a good track record: The company should be well-established and have a good financial history.
  • Provide adequate documentation: This will include tax returns, company accounts, and business plans.

Importantly, your limited company director status does not typically disqualify you from being potentially acceptable as a borrow to any mainstream mortgage lender.

Calculating Mortgage Affordability

As a limited company director, you have several options for calculating your mortgage affordability.

The most common approach is to combine your salary and dividends – averaged over your previous two years’ tax calculations.

This average figure provides a basis for determining the mortgage amount you can afford.

However, it’s important to note that your net profits, which have not yet been taxed, can be utilized to drive your maximum affordability instead of your dividends.

By including your share of net profits post-corporation tax, you can potentially increase your borrowing capacity. This approach is suitable when you have significant retained profits within the business.

It’s essential to plan well in advance when applying for a mortgage as a limited company director. You will be using accounts that can be up to three years old, so understanding your options and the basis for application is crucial.

Consulting with a qualified accountant is highly recommended, as they can provide the necessary documents and guidance tailored to your circumstances.

Other Considerations

When applying for a mortgage, keep in mind that not every shareholder needs to be on the application. If you co-own a company with someone else, you can still rely on your share of net profits from the business. However, it’s important to note that the mortgage amount will be based on your share of the net profits, which can affect borrowing capacity.

Conculsion

Obtaining a mortgage as a limited company director may seem complex, but it is certainly not impossible. By understanding the basics of being a limited company director, the income structures available, and the eligibility criteria, you can make informed decisions and approach lenders with confidence. Remember, planning ahead, seeking professional advice from an accountant, and choosing the right approach to calculate affordability are key factors in successfully securing a mortgage.

Frequently Asked Questions

Can a company director get a mortgage?

Absolutely a limited company director can definitely get a mortgage. However the process of obtaining a mortgage for a limited company director can be a little more complex than for a regular employee.

How much does a company director need as a deposit?

The deposit requirements for limited company director are likely to be no different than for anyone else. That means that you’re going to need a deposit of at least 5%. Remember the rate that you qualify for is typically driven by the size of the deposit you can contribute.

How much trading history is required to get a limited company director mortgage?

You’re typically going to need at least two years proof of trading history. That will come in the form of your completed company accounts. That being said, in some cases you may be able to get a mortgage as a limited company director with only one completed years trading accounts. In fact if you have been associated with this business or you’ve previously traded as a sole trader, you may be able to get a mortgage without even having submitted one year’s accounts. 

Can I use a residential mortgage to raise funds to invest back into my limited company?

Perhaps unsurprisingly most lenders will not allow you to borrow money for the purpose of investing back into your business. However, that being said there are one or two lenders that will allow you to borrow for this reason. As financial advisors and mortgage brokers we do have to be careful providing advice along these lines because remember whenever you borrow money against your home that increases the potential for you to miss payments and for the property to be repossessed.

How much can I borrow on a mortgage as a limited company director?

As a general rule of thumb, and as a starting point you may be able to borrow around 4.25 times your income. By income we mean a combination of either your 2 year averaged salary and dividends, or a combination of your two year averaged salary and share of net profits.

Do my accounts have to be signed off by a chartered accountant?

We would always suggest that you get your accounts signed off by a chartered accountant. This is because having an accountant on board is likely to open up a wider range of mortgage options for you (and probably better deals!)

That being said it isn’t completely necessary. Some lenders can assess your eligibility based on your personal tax calculations which are produced by HMRC.

If you wish to rely on Net Profits, you will most likely require an accountant.

Can I get a mortgage if I have changed my company type?

Most lenders do want to see two years trading as a limited company before they’ll even consider offering you a mortgage. Fortunately we work with a number of lenders who will potentially consider an application from someone who is switched from self-employed to a limited company on the advice of their accountant. Even though the sole trader enterprise no longer trades, these lenders or assess the future expected performance of the limited company based on the previous performance of the self-employed enterprise.

What people are saying:

Ann-Marie JonesAnn-Marie Jones
17:47 18 Jan 24
Highly recommend Chris at Exley Financial Planning. He was really helpful and has walked through each stage carefully with patience and helped secure us a better rate on our mortgage.
Jasmine ScottJasmine Scott
20:21 18 Jul 23
I’ve had the pleasure of working with Chris now for over 6 years. He’s arranged my last three mortgages for me successfully. I’ve always found Chris to be highly efficient, and clear and open in all of his communications. He’s also taken the time to explain my options and be at the end of a phone. I trust him implicitly and would recommend him to anyone looking for sound financial advice and support regarding money matters.
Mike WilliamsMike Williams
16:37 18 May 23
Couldn't recommend a better financial planning advisor.Chris's help, advice and knowledge base was second to none.
Deborah NDeborah N
11:41 18 May 23
Chris was outstanding. His service was attentive, comprehensive and he displayed an impressive knowledge of his field. He was always easy to contact, friendly and returned calls and messages promptly. His help was invaluable. We are incredibly grateful for all his assistance and wouldn't hesitate to recommend him to others.
Jay ProbertJay Probert
12:02 07 Jul 22
Chris was referred to my wife an i by a neighbour. Despite conducting all communication online (emails/MS Teams calls) at all times Chris has remained personable and responsive. My wife and i are far from experts in this field but Chris' calming approach to the process has been most reassuring and would strongly recommend his services to others. Thanks Chris.
Alexia BowlerAlexia Bowler
08:27 25 Apr 22
We recently used Exley Financial Planning (Chris) for our mortgage and they were so professional, efficient and listened to our every need. We got some very good advice and felt confident that they had our interests at heart. I would use Exley Financial Planning again for anything finance related, and feel relieved we've now got someone who takes us through documents and processes (most of which are fairly confusing!), step-by-step. Thanks Chris!
bethan boddybethan boddy
11:55 08 Mar 22
Fantastic service from Chris.Chris helped me with the process of getting my mortgage from start to finish. As a first time buyer, I was clueless. Having Chris help me made the process a lot easier and he was able to explain information to me that I was unsure off.I highly recommend this company to anyone, especially first time buyers.
Ellen MorganEllen Morgan
08:26 31 Mar 21
I can’t thank Chris enough for all his help throughout my purchase. It hasn’t been an easy process buying my first home during a pandemic, but Chris made securing a mortgage a breeze! Chris is very knowledgable and was honest with me from the outset about what was affordable for me and the mortgages available. It has been a long process for me, but Chris is always available on the other end of the phone to answer any questions I had and kept me updated every step of the way. Brilliant service, I would highly recommend! Thank you Chris!
Rod DCRod DC
19:42 19 Aug 19
Chris has been absolutely fantastic in helping us secure our mortgage offer.Our own situation was a bit more complex due to work and contracts but Chris has worked extremely hard to find us a mortgage that suits us.The quality of service has been top notch from the first meeting. Communication has been excellent and we have been constantly updated on the situation and progress of all processes.It has been so worth employing the services of Exley and I cannot recommenced the service more.
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