Can Retained Company Profit Help With Mortgage Affordability?

A limited company can be profitable without its director withdrawing all of that profit personally.

That creates an important mortgage question:

"Can a lender take account of profit left inside my company when assessing how much I can borrow?"

With some lenders and in appropriate circumstances, company profit may form part of the income assessment.

With others, it may not.

This difference can materially affect affordability for company directors.

Why Do Directors Leave Profit in Their Companies?

A business owner may deliberately retain money inside the company rather than withdraw everything as salary or dividends.

Possible business reasons include:

• Maintaining working capital
• Funding expansion
• Purchasing equipment
• Protecting cash flow
• Building reserves
• Meeting future liabilities
• Financing future projects

Mortgage lenders are not all required to interpret those retained funds in the same way.

Salary and Dividends

Many company directors receive income through a combination of:

• PAYE salary, and
• Dividends

A lender assessing only those amounts might calculate the applicant's mortgage income using the amount actually withdrawn personally.

For example:

Salary: £15,000 Dividends: £25,000

Potential assessed income under that methodology:

£40,000

But suppose the company itself generated substantially more profit.

Another lender's criteria may potentially allow a different method.

Salary Plus Share of Company Profit

Some lenders may assess eligible company directors using salary plus an appropriate share of company profit.

This can be particularly relevant where the director retains profits rather than taking larger dividends.

However, this does not mean:

Company profit = personal mortgage income

in every case.

The lender will still apply its own methodology and underwriting.

Which Company Profit Figure?

This is where terminology becomes important.

Company accounts contain figures such as:

• Turnover
• Gross profit
• Operating profit
• Profit before tax
• Corporation tax
• Profit after tax

These figures are not interchangeable.

A lender allowing company profit to be considered will specify which figure its criteria use.

Do not assume that the largest profit number in a set of accounts is the income that can be entered into a mortgage application.

Turnover Is Not Profit

A company with turnover of £500,000 has not necessarily generated £500,000 of income for its director.

The business may have substantial costs.

For example:

Turnover: £500,000 Business costs: £430,000

The size of the company and the income available for mortgage purposes are two different things.

That distinction is fundamental.

Ownership Percentage Matters

If you own 100% of a company, the potential assessment may differ from someone owning 25%.

Where lender criteria allow a share of company profit to be considered, the applicant's ownership interest can influence the amount potentially attributable to them.

The lender may also have its own threshold for determining when a company shareholder is treated as self-employed.

What If There Are Two Directors?

The lender may consider:

• Each applicant's ownership percentage
• Salary
• Dividends
• Relevant share of profit
• Whether both directors are mortgage applicants

The same company accounts can therefore produce different assessable incomes for different shareholders.

Does the Money Have to Be Physically Sitting in the Bank?

Profit shown in accounts and cash held in the business bank account are not necessarily the same thing.

A profitable business can have money tied up in:

• Stock
• Debtors
• Equipment
• Working capital

Likewise, a large bank balance does not itself prove sustainable profit.

Mortgage underwriting considers the business financial position rather than simply looking at one bank balance.

What About Retained Earnings From Previous Years?

The phrase "retained profit" is often used loosely.

Borrowers may mean:

• Profit generated this year but not withdrawn
• Accumulated reserves from earlier years
• Cash currently held by the company
• Retained earnings shown on the balance sheet

These concepts are related but not identical.

A mortgage lender will apply its own rules about the company figures it is prepared to use.

Is the Profit Sustainable?

A lender considering company profitability may also look at whether it appears sustainable.

Imagine:

Year 1 profit: £70,000 Year 2 profit: £75,000

That presents a different trend from:

Year 1 profit: £100,000 Year 2 profit: £40,000.

A significant decline may require explanation.

The lender may also want to understand:

• Current trading
• Industry conditions
• Business liabilities
• One-off income
• Exceptional expenses
• Changes in ownership

Accountant's Certificate

Some lenders may request information directly or indirectly confirmed by an accountant.

This can include:

• Trading period
• Income
• Profit
• Ownership
• Business performance

An accountant's certificate does not force the lender to use a particular figure.

It helps substantiate information for underwriting.

Should I Take a Bigger Dividend Before Applying?

Do not restructure your remuneration purely because you think it will help a mortgage without considering the wider implications.

Increasing salary or dividends can have:

• Tax implications
• Cash-flow implications
• Accounting consequences
• Business consequences

Mortgage advice and tax/accountancy advice serve different purposes.

A better starting point is to establish whether lenders already exist whose legitimate assessment method fits the way your income is currently structured.

Example

Consider a director who receives:

Salary: £15,000 Dividends: £25,000

The company also reports relevant profit substantially above the dividends paid.

Lender A

Uses salary + dividends.

Potential starting figure:

£40,000

Lender B

Its criteria allow salary plus an appropriate share of qualifying company profit.

Its assessment could therefore produce a different starting income figure.

This does not mean Lender B will necessarily lend more.

Its wider affordability calculation may also be different.

The example simply demonstrates why lender selection matters.

When Is This Particularly Relevant?

A company-profit assessment may be worth exploring where:

• You retain substantial profits.
• You take a relatively modest salary.
• Dividends are lower than underlying profitability.
• Your company has strong accounts.
• Mainstream affordability is insufficient.
• You own a significant proportion of the business.
• Your latest year's results have improved.
• You have previously been assessed only on salary and dividends.