Company Director Mortgage using Profit vs Dividends

For prudent Company Directors, being as tax efficient as possible is usually a priority.

It’s common for Company Owners to take a small salary and dividend as income and leave excess profit in the business.

However, when it comes to mortgages, this can cause some issues with affordability.

Arranging a Company Director Mortgage using profit instead of dividends could be the answer.

Dividends vs Profits

Most lenders look at dividends as opposed to profit when calculating mortgage affordability.

Where these is large difference between the dividends a company owner takes vs their share of business profit, this can have a huge impact on the outcome.

It’s also important to remember that Company Directors are usually underwritten as self-employed.

Technically, Company Directors are PAYE employees. However, where they have a certain shareholding (usually 20%+), they are treated as self employed for mortgage purposes.

This means that lenders will usually ask for tax returns instead of payslips and could see Company Owners as higher risk.

Can I get a mortgage using company profit?

There are some lenders who may consider using company profits instead of dividends when calculating affordability.

Where the Company Director’s share of profit is much larger than the dividend they have taken, this can have a big impact on the result.

Example

A Husband and Wife with a 50/50 shareholding in a business. The business makes £200k profit, they take £12.5k each in Director’s Salary and £37.5k each in Dividends.

Lender 1 – Using Dividends

£25k Joint Salaries + £75k Joint dividends = £100k usable income

£100k X 4.5 (average multiple) = £450,000k maximum Loan

Lender 2 – Using Profit

£25k joint salaries + £200k profit = £225k usable income

£225k X 4.5 (average multiple) = £1,012,500 maximum loan

There are other factors that a lender will consider, but adopting this approach could make a big difference to the loan amount made available.

(NOTE – It’s important to remember that just because you can, it doesn’t mean you should. The loan needs to be comfortably affordable both now and in the future).

How much can a Company Director borrow for a mortgage?

This will depend on each person’s individual circumstances and the lender selected.

Examples of business considerations include –

• Trading period
• Track record
• Shareholding

Personal considerations include –

• Credit score
• Age
• Liabilities
• Financial conduct

Examples of where lenders differ include –

• Pre tax figures vs post tax
• Average of last 2 years vs latest year
• Minimum 3 years trading vs 1 years trading

All of these factors can have an impact on the loan offered.

In favourable cases, it might be possible to borrow up to 5-5.5X income for Company Director Mortgages. This could be slightly more for professional mortgages.

What documents to I need to provide?

In addition to the standard requirements such as –

• Identification
• Proof of Address
• Bank Statements

There will be Company Director specific requirements such as –

• Accounts (1-3 years depending on the business)
• Tax Returns
• Business Bank Statements

Depending on the track record of the business, the lender may also need further comment from the Accountant. This could be due to certain expenditure for the business or simply around sustainability.

Is it harder to get a mortgage as a Director?

It can be. It really depends on who you speak to.

Although as mentioned above, there are some lenders who look favourably on Company Directors, the results can still be massively different between them.

It’s important to seek specialist advice in order to make sure you get the right outcome.

If you are looking for assistance with a Company Director mortgage using profit, please contact us for a no cost, no obligation call.