We recently took a call from an enquirer that got the A Mortgage Now team thinking about common misconceptions around getting a mortgage with a limited company. We find ourselves often explaining to clients exactly what lenders are looking for when considering applications from directors of limited companies. Because of this, we thought it best to share our knowledge to raise awareness of the do’s and don’ts when it comes to getting a mortgage when owning a limited company.
In this scenario, our enquirer and his wife both ran a limited company and, in each case, the partner was a 100% shareholder in the company. They had found the property they wished to purchase and had already had an offer accepted.
They had engaged an independent mortgage broker some months before and assumed that they wouldn’t encounter any issues getting a mortgage as limited company directors because the broker had advised them to pay themselves PAYE to support their application. It also tells the lender if the applicant will be making the decision on whether dividends are paid (+50% shareholding), or indeed if the shareholding is small enough that the lender can consider the applicant as an employee (-25% shareholding).
At the time of the mortgage in principle application, they were paying themselves £3,000 and £4,000 per month respectively via the PAYE system. They submitted their application which was refused by the lender because the profit from their businesses did not indicate that the PAYE being received was affordable for their limited company.
During our discussion with the client, it became apparent that they had no chance of raising the £200,000 mortgage borrowing they needed at the current time, for the current purchase. In fact, they had simply paid out a lot of employer and employee National Insurance and income tax to no benefit.
So, what was the problem, and how do lenders look at this issue?
What you need to know when getting a Mortgage as a Limited Company Director
If we take matters back to basics and consider how both limited company income and company director income work, we can better understand how lenders think.
A business generates monthly revenue which totals over a year into an annual turnover. The business also incurs costs to generate sales and run the business such as office and sales support staff and finance departments (known as overheads). These costs are taken from the turnover each annual trading period to arrive at a pre-tax profit figure. The business then pays Corporation Tax on the profit figure leaving a post-tax profit figure.
How a Limited Company Director takes personal income from the business matters
A company director can take personal income from the business in two ways:
- via PAYE as a limited company director
- via Dividends as a company shareholder
(The director may also take expenses or repayments on a loan to the business, both are not an income as they are simply a return of funds already paid out)
When getting a mortgage as a limited company director what factors are important to the mortgage lender?
What is the level of shareholding in the limited company of the mortgage applicant?
This percentage share of the limited company is important because it informs the lender as to the share of profit to factor in for the applicant.
Is the limited company profitable, and if so at what level?
If the limited company director is taking PAYE and or dividend from the business, the mortgage lender will work out if this can be sustained given the profit the business is currently generating. If a limited company director is taking PAYE and the business is making a loss, then that is not a sustainable situation and they will therefore be less likely to lend.
How long has the limited company been profitable, and at what level?
If the limited business has only recently been profitable the mortgage lender takes a risk knowing that profitability may not continue. If there has been a material dip in profit the lender will want to know if that pattern is likely to happen again.
Has there been a big change in the profitability of the limited company?
If so, the mortgage lender will seek what activity accounts for the change. They will investigate whether there has been one large order that has skewed the figures for example, and if this is the case they will need to know if they can rely on the profit figure.
The Mortgage Lender’s response as a result of your answers
The majority of mortgage lenders will underwrite for limited company directors based on PAYE and dividends averaged over the last two tax years (with the most recent year completing within the last 15 months).
Some lenders will work on the most recent years’ figures alone if they are higher. Some lenders will work on a single year’s figures for a newly established business. See our mortgage with 1 years accounts page for more information.
What if I don’t take or want PAYE or Dividends from the business?
There are mortgage lenders in the market that will work on post-tax profit and PAYE (ignoring dividends) for limited company directors.
Other points to consider when getting a mortgage with a limited company
Lenders will look up your limited company on the Companies House register and it is easy for them to establish who the directors are and whether you have a substantial shareholding (controlling interest).
They can also see when the business was established, and check balance sheets on recent micro account returns.
What you as a Limited Company Director need to provide to your Mortgage Lender
A mortgage lender will typically look for tax calculations and tax year overviews covering the last two tax years. They may also require signed full accounts covering the last two trading years (this means accounts signed by you and ideally by your accountant, and full accounts not abbreviated accounts).
Some mortgage lenders will work from a reference from your accountant, but this is rare.
A lender may also ask for copies of limited company bank statements to evidence recent revenue and good conduct.
Common mistakes when getting a mortgage with a limited company
The most common mistake when getting a mortgage as a limited company director is to assume that paying yourself PAYE mitigates any issues with the mortgage application.
Another common mistake is expecting mortgage lenders to work on current trading year figures ignoring previous completed years – a sudden upshot in trading revenue cannot be relied on for lending purposes. You can read more information about this on our mortgages for company directors page.
Some of the borderline fraudulent mistakes that can be made by limited company directors include:
- pretending to be employed and not mentioning limited company ownership
- changing ownership of the business just prior to application
The golden rule when getting a mortgage with a limited company
We frequently quote our golden rule to limited company directors which is:
Do not make business or taxation decisions based on targeting a successful mortgage application. Run your business and tax affairs first and worry about your mortgage afterward.
How can I increase my chances of a successful Mortgage Application?
- Always use an experienced mortgage broker
- Submit your tax returns and pay your taxes to ensure your Tax Calculations and Tax Year overviews are in order
- Be upfront and open with your broker about any information regarding your limited company that could be relevant
If you are interested in getting a mortgage when self employed please contact us to speak to a mortgage expert today.