How Do Mortgage Lenders Assess Limited Company Directors?

Being the director of a profitable limited company does not necessarily mean every mortgage lender will assess your income in the same way.

This is one of the most important differences between mortgages for conventional PAYE employees and mortgages for company directors.

The same set of company accounts can potentially produce very different mortgage affordability depending upon which lender is assessing them.

Why Company Director Mortgages Can Be More Complicated

A PAYE employee may have a salary of £50,000.

Subject to normal underwriting, the lender has a relatively clear starting figure.

A company director might instead have:

• £15,000 salary
• £25,000 dividends
• Additional profit retained within the company

What is the director's mortgage income?

There is no universal answer.

Different lenders may calculate it differently.

Salary and Dividends

A common approach is to consider:

Director salary + dividends

If the director received:

Salary: £15,000 Dividends: £25,000

a lender using this approach might assess £40,000 before applying the rest of its affordability calculation.

However, this can sometimes create an issue for directors who deliberately leave profits inside their company.

Why Directors Retain Profits

Business owners may not withdraw everything the company earns.

They may retain funds for:

• Working capital
• Future investment
• Equipment
• Tax liabilities
• Business resilience
• Expansion
• Cash-flow management

The fact that profit has not been extracted personally does not necessarily mean the underlying business is weak.

However, not every mortgage lender will treat retained profit as personal mortgage income.

Salary Plus Company Profit

Some lenders may have criteria allowing them to consider a director's salary alongside an appropriate share of company profit.

This can sometimes produce a materially different result from salary plus dividends.

For example, two directors with identical companies could potentially receive different mortgage affordability depending upon the lender's methodology.

This does not mean company profit can automatically be used.

The lender will normally need to satisfy itself regarding issues such as:

• Ownership percentage
• Trading history
• Profitability
• Sustainability
• Company liabilities
• Accounts
• Recent performance

Ownership Percentage Matters

The percentage of the business owned by an applicant can affect how lenders classify and assess them.

An applicant with a small shareholding may be treated differently from somebody who controls most or all of the company.

Different lenders have different definitions of what constitutes a self-employed company director for mortgage purposes.

Which Profit Figure Matters?

Company accounts contain several profit figures.

Borrowers sometimes see a large turnover or gross profit figure and assume it can be used for mortgage affordability.

That is not how lender assessment generally works.

Depending upon lender criteria, consideration may instead involve figures such as:

• Net profit
• Profit before tax
• Profit after tax
• Applicant's share of profit

The exact calculation can vary.

This is why the lender's criteria need to be understood before relying upon a particular figure.

Latest Year or Average?

Company directors can face the same issue as other self-employed applicants.

Suppose company results are:

Year 1: £40,000 relevant income Year 2: £65,000 relevant income

One lender's methodology may place greater emphasis on averaging.

Another may potentially give greater consideration to the latest year's performance where criteria permit.

The outcome can affect maximum borrowing.

What If Profit Has Reduced?

A declining trend is likely to receive attention.

If historic figures were strong but the latest year is materially lower, an underwriter may ask:

• What caused the reduction?
• Is the business still profitable?
• Is the decline continuing?
• Have contracts been lost?
• Has remuneration changed?
• Is current trading stronger or weaker?

Historic success does not automatically override more recent deterioration.

What Documents May Be Required?

Depending upon lender and circumstances, a company director might be asked for:

• Finalised company accounts
• HMRC Tax Calculations
• Tax Year Overviews
• Payslips
• Personal bank statements
• Business bank statements
• Accountant's certificate
• Evidence relating to current trading

Not every lender will require every document.

Why an Accountant's Figure and a Lender's Figure Can Differ

Your accountant prepares accounts and tax information for accounting and taxation purposes.

A mortgage lender is answering a different question:

"What level of income are we prepared to rely upon for long-term mortgage affordability?"

A figure being accurate within company accounts does not automatically mean the lender will use it in full.

When Should a Company Director Seek Specialist Advice?

It may be particularly useful where:

• Your latest year is significantly stronger.
• Your income has recently increased.
• You draw a modest salary.
• You retain profits.
• Your dividends vary.
• You own a substantial share of the business.
• Mainstream affordability is insufficient.
• You have only a short trading history.
• Your company structure has recently changed.
• You have already been declined.