As a company director, working out how lenders will assess your income for a mortgage is far from straightforward.
It's further complicated by the fact mortgage providers assess some company directors as employees, rather than self-employed.
In this short guide, we explain the criteria lenders use to make this distinction, how your income is assessed if you're treated as an employed director and the implications for how much you can borrow.
- How do lenders decide if I'm employed or self-employed for mortgage purposes?
- How long does a company director need to have been employed?
- As an employee director, can my dividends or share of net profit share be used?
- How much can employed and self-employed company directors borrow?
- The advantages and disadvantages of being an employed director
- Getting a director mortgage quote
How do lenders decide if I'm employed or self-employed for mortgage purposes?
Most mortgage providers consider a company director a self-employed applicant if their shareholding exceeds a certain percentage. The threshold is typically 25 per cent but some lenders use 20%. One mainstream lender uses just 10 per cent.
If your shareholding in the company is lower than the bank or building society threshold, then you'll be treated as employed for mortgage purposes.
This can mean that just your director's salary is taken into consideration for income assessment, not your dividend income or share of net profits.
As we'll see, this can have a dramatic effect on the maximum amount you're able to borrow.
Can joint applicants' total shareholding be considered when determining employment status?
Yes. Where both joint applicants are shareholders in their business, some mortgage companies will use the aggregate shareholding when assessing their employment status.
For example, if each applicant owns 15% of the company, and the lenders threshold is 25%, both borrowers would be considered self-employed.
Note the above only applies for directors and shareholders of the same limited company, not different businesses.
How long does a company director need to have been employed?
As an employee company director, it's possible to get a mortgage with as little as one month's employment record. However, a requirement for 3-6 months employment history is more common.
If you're working for a family business, some lenders will want to see evidence of 12 months of employment history. This is to ensure the income isn't being staged for the purposes of securing the mortgage.
As an employee director, can my dividends or share of net profit share be used?
Yes. Whilst the vast majority of providers only accept an employed director's salary for income assessment, a few will consider salary and dividends/share of net profit.
Some only use a proportion of the dividend income; 50% is common. Others only use the net dividend figure after income tax has been paid, as declared on your self-assessment tax calculation.
