The Complete Guide To Mortgages For Company Directors

How much deposit will I need?

Subject to the usual credit checks, there are many 5% deposit mortgages available for limited company directors with two or more year's HMRC submitted accounts.

However, with just a single year's accounts, mortgage lenders typically require a 15 per cent deposit.

Other factors that affect mortgage deposit requirements

Another thing to bear in mind is that mortgage lenders work on a tiered LTV basis, whereby the maximum loan-to-value decreases as the mortgage amount increases above a certain threshold.

The good news is this doesn't usually become an issue until you're borrowing £400,000 or more.

For a buy- to-let purchase or remortgage, the maximum LTV is typically 75 or 80 per cent. Speak to a mortgage broker at SEMH if you want to find out about the options available to you.

Deposit requirements for new build leasehold properties

Another factor that can affect the maximum LTV, is the type of property you are buying.

Some lenders require a larger deposit of 10-15 per cent to buy a new build flat or maisonette.

New build properties are sold at premium prices and so, a bit like driving a brand new car off a dealer's forecourt, can depreciate in the first two year's of ownership.

In addition, leasehold properties are considered a weaker form of security, so a bigger deposit helps mitigate their risk.

You'll find the best mortgages for company directors are reserved for borrowers with larger deposits of 25-40 percent, but there are still excellent interest rates available at higher LTV's.

How much can a company director borrow for a mortgage?

A company director can borrow around 4.5 times either a single or joint income for a mortgage. For higher earners, 5-6 times income is possible, depending on circumstances.

Regardless of the loan-to-income multiple used, limited company directors must have a sufficiently large shareholding in the company to:

• be classed as a self-employed company director, not an employed director,
• afford the monthly mortgage repayments based on existing credit commitments.

In assessing your self-employed income for affordability, the bank or building society will use either:

• salary and dividends OR
• salary and share of net profit in the company.

The majority of high street lenders still work off base salary and shareholder dividends.

Also, it's important to bear in mind that they won't accept the dividend figure if it's been boosted from previous year's retained profits. Only dividends taken from net profits in the most recent year will suffice.

Fortunately, there are mortgage lenders happy to consider salary and share of net profits.

Either way, most lenders average the income over the last 2 years. However, it is possible to get a mortgage based off salary and net profit from the latest year's company accounts.

A couple of lenders will even consider pre-tax net profit, but averaged over the last 2 year's accounts.

To see how the different methods of income assessment affect the maximum borrowing amount, let's run through a few examples:

Example 1: Salary and dividends

Pete is a company director and 100% shareholder in a bakery business in Wrexham.

His limited company declared net income after corporation tax of £47500 in the accounting year ending March 2023. In the previous year, net profit was slightly lower at £46000.

However, to keep himself below the higher rate income tax threshold, Pete paid himself an annual salary of £12500 and drew dividends £37500 in the 22/23 tax year, exactly the same as the previous year.

With an annual income of £50000 and 4.5 Loan-to-Income (LTI) multiple, he could potentially borrow up to £225,000 for a self-employed mortgage.

Example 2: Latest year's salary and post-tax profit

Using the same 4.5 x income multiplier and Pete's latest year net profit figure of £47500, he can now borrow £270,000.

The calculation is ((£12500+£47500) x 4.5).

Borrowing more if you're a high earner

Banks and building societies are often willing to use larger income multiples for high-earning company directors.

It's possible to borrow 4.75 or 5 times income, whilst a few lenders will go to 5.5 or even 6 times earnings for high earners or self-employed professionals in exceptional circumstances.

Each mortgage provider has its own definition of what constitutes a high earner, but £75000 or more per annum in salary and dividends is a good benchmark.

Always weigh up carefully if borrowing more based on a higher multiple of earnings is prudent and that you are comfortable with the monthly mortgage repayments.

How is affordability assessed?

All maximum borrowing figures for company directors are subject to affordability assessments by the lender's underwriters.

With mortgages for company directors, your credit score, ongoing credit commitments, financial dependents, and other committed expenditures like child maintenance, private school fees and spousal support, are all assessed to determine how much you can afford to borrow.

Stress testing mortgage affordability

The FCA also requires all mortgage providers to carry out a 'stress test' of the borrower's ability to service the monthly mortgage payment at a higher interest rate than the mortgage rate available.

So as you can see, there are many factors lenders have to consider in determining how much you can borrow, and your earnings are just part of the equation.

I'm a contractor and use my Limited company to receive my earnings. How much can I borrow?

For contractors, the situation is slightly different. In many cases, subject to a satisfactory credit history, your day rate can be considered when assessing your income.

Let's take Joanne, a limited company director who works 4 days a week as an IT contractor and wants to get a mortgage to buy her first home. Her day rate is £400.  

Most lenders will calculate Joanne's earnings based on 46 work weeks per year. E.g 46 x 4 x 400 = £73600. On a 4.5 income multiplier, her maximum borrowing amount could potentially be as much as £331,200.

How has the cost of living crisis affected mortgage affordability?

Since the Bank of England started raising the base rate in December 2021, and the cost of living crisis hit in 2022, lenders have progressively increased their interest rates as well as tightened affordability criteria for self employed mortgages.

Each provider uses it's own methodology to calculate a maximum borrowing amount, so company directors won't aren't always able to borrow the full 4.5 income multiplier. Particularly if there are large outstanding credit commitments.

Can I get a director mortgage using my limited company's net profits?

Yes, borrowing using your share of company net profits is possible with some lenders.

As a business owner, leaving cash in the company to fund future growth, or to minimise personal tax bills, is often a good idea.

But when you want to get a mortgage, retaining profits can have the unfortunate side effect of reducing the amount you can borrow from those lenders who only accept salary and dividends.

Fortunately, some mortgage companies will consider a limited company director's salary and share of net profit when applying for a mortgage. Potentially allowing you to borrow a lot more.

Using net profit may not always be the best choice though. Our company director mortgage guide to net profit vs dividends explains the pros and cons of each option.

Are limited company directors considered self-employed?

Yes, provided the company director meets the lender's minimum shareholding percentage. Our guide to self-employed vs employed company directors has more information on how lenders consider each employment status.

Can I get a mortgage using my latest year's company accounts?

Yes, as long as profits are increasing, it's possible to get a mortgage using your latest year's accounts with some lenders, maximising your borrowing potential.

Let's use Megan's bakery business as an example. Her accounts reveal a combined salary and post-tax net profit of £65,000 in her latest year, but only £30000 in the previous 12 month period. Giving her an average income figure of £47,500 over two years.

However, using just her latest years' accounts of £65000 would allow Megan to potentially borrow a loan amount of £292,500 versus just £213,750 with the two-year average.

As part of their affordability assessment checks, mortgage firms require evidence the limited company is growing profits sustainably, and not just because of a one-off event due to exceptional factors.

One thing to bear in mind. If you've made a profit in your latest year but a loss in the previous year, many banks and building societies will be uncomfortable lending.

A niche or specialist lender may consider the loss, as long as you have a good credit score and the explanation for it stacks up.

Can I get a director mortgage with bad credit?

Yes, you can get a company director mortgage if you have bad credit. However, it will make getting a mortgage trickier, and probably more expensive, particularly for severe credit events like an IVA, repossession, or ex-bankruptcy.

Banks and building societies make lending decisions based on how severe and how recent the bad credit event(s) are.

Some mainstream providers only accept mild adverse credit. For example, they may lend if there are just have a couple of missed credit card payments in the past two years.

Getting a director mortgage with very bad credit

On the other hand, a specialist lender may have more flexible lending criteria, and a greater tolerance of very bad credit histories.

They may even consider mortgage applications from company directors who've been discharged from bankruptcy in the last few years or who've recently settled an IVA.

If you have an adverse credit history and would like to speak to a mortgage broker at SEMH, please get in touch.

What documentation do I need to prove my income?

To get a mortgage, you'll need to provide some or all of the following documentation so the lender can assess your income and expenditure:

• Limited Company accounts for the past 2 years (if applicable) to verify the company profit & loss account and balance sheet.
• SA302 Tax Calculations and Tax Year Overview docs for the last 2 years (if trading that long). A tax return isn't accepted.
• your last 3 months business bank statements.
• your last 3 months personal bank statements.

For a detailed guide to all the documents you'll need to provide for the mortgage application, check out our self-employed mortgage documentation checklist.

Mortgage advice for limited company directors

Applying for a mortgage as a limited company director needn't be difficult.

As a specialist broker, we have a deep understand of mortgage lending criteria for business owners. Our goal is to save you time and worry, and always get the best mortgage deal for your circumstances.

In most cases, exactly the same mortgage rates and products are available for self-employed applicants as employed ones.

At SEMH, we have access to a huge range of mortgage products from both high street lenders and specialist providers.

The latter, whilst more expensive, tend to be more flexible in their lending criteria for limited company directors who have unusual circumstances, such as complex income, a purchase of a non-standard property, or foreign earnings.

To discuss your mortgage options and to get the most suitable company director mortgage deal for your circumstances, please call 0117 205 0655 or take our quick quiz to schedule a call with an adviser.

We can also help protect your family and income with a range of tax-efficient protection policies including director's executive income protection, shareholder protection insurance and relevant life cover.