Getting a mortgage offer when you are the director and owner of a limited company can sometimes be challenging. This is particularly true when trying to evidence your earnings. Unlike most salaried employees, the self-employed and most company directors will not have a simple straightforward contracted income that can be evidenced via monthly payslips and a P60.
Why can getting a mortgage with a limited company be challenging?
When you are the director of a limited company, your annual remuneration can sometimes be a little variable. It will often be dependent upon the performance of your business. This can cause lenders to be cautious when assessing the reliability of your current and future earnings.
Company directors will often take their remuneration in a few different ways in order to minimise their personal tax charges. These tax-efficient structures are all quite legal and will generally be recommended by an Accountant. They can, however, prove a little more challenging to evidence to a prospective mortgage lender.
To help you achieve this, we would always recommend getting the help of an experienced mortgage advisor and broker, such as us here at Mortgage Light. We have experience in supporting clients in such situations. We are able to recommend lenders that understand and are sympathetic to applications from such individuals.
That being said, it is certainly possible to prove your remuneration to a mortgage lender. You may just need the help of an experienced mortgage advisor and broker who understands your situation and knows which lenders to turn to.
Not all lenders are willing to consider some of the slightly more complex income structures often used by company directors. Fortunately, however, there are a number of lenders available who are willing to be more flexible when considering facilities from such applicants. Here at Mortgage Light, we have experience of how best to present a mortgage application, along with the necessary proof of income needed by such lenders to ensure that they have the best understanding of your financial situation.
How can remuneration for a limited company be taken?
Unlike alternative business structures, such as a sole trader or a partnership, limited companies are entirely separate legal entities to the individual. As such, they employ the directors to work for their benefit. Directors can therefore receive a contracted salary in much the same way as any other company employee would.
However, many directors are also shareholders of their company. This means that they can choose to take some of their income from the business by way of a dividend on their shares in addition to their monthly salary. Income from salary and income from dividends are treated differently for tax in the UK, with dividend income avoiding a National Insurance charge. This makes it more tax efficient and therefore more attractive to the recipient.
It’s fairly common, therefore, to see company directors take a minimum salary of up to the amount of their individual personal tax-free allowance (currently £12,570 pa) and then take the rest of their remuneration in dividends. This keeps their annual tax bill to a minimum.
They may also consider taking part of their remuneration by way of an annual pension transfer or via company benefits. This could be through a company car or free medical insurance. Some of these benefits, however, can be taxed as benefits in kind. This makes them slightly less attractive. Understanding these different options can be important when presenting a mortgage application to a potential lender.
So, how can I prove my income as a limited company director?
As we’ve touched on, a varying income can be a challenge for lenders when trying to assess the affordability of mortgage borrowing to a director of a limited company. For this reason, the majority of lenders will usually want to base their assessment upon an average of the income earned by the applicant over a number of recent years, rather than taking figures from just the last year’s company accounts if possible.
Generally speaking, there are three types of documents that you will generally need to provide as proof of income:
- Normally a minimum of the last three years’ company accounts, certified by an accountant
- Copies of personal bank statements for at least the last six months
- Two years SA302’s and overviews
When it comes to claiming a company’s retained profit as potential income, lenders can consider these as part of your earnings. If you do want a lender to consider retained profits towards your earnings in order to support a mortgage application, then they will want to do due diligence on the company and ask a few additional questions.
What else do I need to provide in order to apply for a mortgage?
As with all mortgage applications, you will need to provide the following documents with your application in addition to the proof of your income as outlined above:
- Proof of the cash deposit you have available
- Photographic ID such as your driving licence or passport
- Proof of address (council tax, utility bill, or bank statement)
It’s important to note that a lender will also run a credit check on you as part of their usual affordability checks.
At Mortgage Light, we would always recommend that company directors use a qualified and experienced mortgage broker and advisor to help them obtain a mortgage. This gives them the best chance of securing the mortgage that they need.
We understand the different remuneration structures that you may be using. We know how to extract the information from the business’s financial records in order to present them to a prospective lender to give you the best chance of being accepted for the facility you want.
Are you a director of a limited company in need of help with a mortgage? Just contact us and we’ll put you in touch with a member of our team.