Limited Company Director
Kabeer Kher and Jon Barton explain how mortgages work for limited company directors.
Podcast approved by The Openwork Partnership on 02/01/2024.
How does the mortgage process work for a limited company director?
On residential mortgages, the process is very similar if you are employed, self-employed, a sole trader or limited company director. The only key difference really would be how the lender would assess your income.
Are there any specific mortgage products designed for limited company directors? Are there any lenders that specialise in providing these products to limited company directors?
In general for residential mortgages it’s the same lenders and they are the same mortgage products.
It can be different in Buy to Let, especially if you’re buying as a limited company. In this case there can be specialist lenders, but in residential there’s no difference, really. You’ll get the same rates, it’s just that they’ll treat your income differently.
What are the eligibility criteria for obtaining a mortgage as a limited company director?
Typically most lenders would look for two years of accounts, but there are some that would allow you to do it after just one year.
That applies on both the residential side and the Buy to Let side as well. There are also lenders out there that wouldn’t necessarily have a requirement for an income for Buy to Let borrowing, depending on the circumstances. It’s best to seek advice for your specific circumstances.
What documents are typically required when applying for a limited company director mortgage?
It very much depends on the lender. Some lenders will want a very detailed breakdown of assets and liabilities, and a property portfolio spreadsheet. That can differ depending on how large your portfolio is.
But in terms of your trading history, it’s really just about your accounts and proving your income, similar to normal Buy to Let. It is very much dependent on the client.
I’m doing one at the moment for a portfolio Landlord who’s bought a property at auction. It can be difficult when you’re on the back foot. If you come to your mortgage advisor as early in the process as possible, we can get together all the portfolio details so that the whole process is a lot smoother once your offer has been accepted.
How do lenders assess the income of limited company directors for mortgage purposes?
Residential lenders will vary drastically in how they’ll assess the income. For example, some will assess your director’s salary plus your retained profits from the business. Other lenders may well look at salary plus dividends. These figures can vary quite considerably.
In addition, some lenders will use your latest trading figures for affordability. Others might look at an average of the last two years. So it’s really key to seek professional advice on it – it’s going to maximise your potential affordability with the most suitable lender for your circumstances.
How do lenders view dividends and retained profits when considering a mortgage application from a limited company director?
For a standard residential application it’s mainly on salary and dividends. But a few lenders will take your profits. It really is best to just speak to a broker and see which situation is better for your circumstances, and then we can figure out which lender to go to.
Can I still get a mortgage if I have a limited trading history as a company director?
Most residential lenders would want a two year trading history, but there are a limited number of lenders that could consider it after a year. It’s just a case of taking advice on which lender will be the most suitable for your situation.
Are there any advantages or disadvantages to getting a mortgage as a limited company director rather than a sole trader?
It can sometimes be a disadvantage if you’re going to a lender that looks at dividends and you’ve not taken those dividends out. For a sole trader, all the profit is the income. With a broker you have flexibility to go to the right lender so that we can circumvent that.
I don’t think there’s any advantages being a limited company from a mortgage point of view. There may be tax advantages, of course, so speak to your tax advisor about that. That tends to be the reason that people go limited.
As I often say, the better your accountant is, the harder job your mortgage advisor is going to have – that tends to be the way of it. But there are lots of options out there. So if you speak to a broker like ourselves, we’ll be able to overcome any issues.
Are there any restrictions or limitations on the types of properties that can be purchased as a limited company director looking to get a mortgage?
No. There’s no real difference on the property acceptability to the lender, whether you’re a limited company, sole trader or employed. It’s always going to boil down to the construction type and whether that’s acceptable to the lender. But they wouldn’t restrict certain properties based on how your business is set up.
Can I use my limited company’s profits or assets to support my mortgage application?
For a residential application, assets aren’t really going to help. If you’re doing a Buy to Let with cash in the limited company, you can then transfer that to a Special Purpose Vehicle and use it for a Buy to Let purchase.
In terms of the profits, it’s around what we’ve already – whether the lender marks out profits as income.
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Are there any tax implications or considerations for limited company directors obtaining a mortgage?
This is really one for the tax advisers. There’s no specific differences in the residential mortgages but there could be advantages and disadvantages for Buy to Let. It’s best to seek professional advice from a tax advisor or an accountant to maximise what’s best for you in your particular circumstances.
How can I improve my chances of getting approved for a limited company director mortgage?
The best thing you can do is speak to a mortgage advisor as early in the process as possible. Some lenders are flexible as to whether or not they treat you as self-employed or employed.
We’ve had cases of people who’ve had a 25% share in a business and actually some lenders out there would consider you employed. By coming to a mortgage advisor early in the process, you can change that ownership structure to make the mortgage application a lot easier.
What is the typical interest rate and repayment term for limited company director mortgages?
The most suitable rate and term will vary from customer to customer. It’s based on your objectives, the mortgage criteria and the deposit. There is no one size fits all, so it’s best to take advice.
Can I use a limited company director mortgage to purchase a Buy to Let property?
It can be beneficial to transfer any cash you have in a limited company into a Special Purpose Vehicle for Buy to Let. It’s a way to use those company profits without having to draw them as income. That can have tax benefits, depending on what your tax advisor says.
A lot of people are doing that – it seems to be becoming much more popular with the tax changes we’ve seen in the last five years.
How does being a guarantor for another person’s mortgage affect my own eligibility as a limited company director?
Lenders will take into account all of your liabilities when assessing suitability for a residential mortgage. Any guarantees will be taken into account, and could potentially reduce the amount you could borrow from that lender. Guarantees will be seen as part of your financial commitments.
Can I remortgage a property as a limited company director? What are the potential benefits?
If it’s a residential remortgage, your income would be considered. That might be your salary plus dividends, or in some cases net profits.
If you’ve started up a new company and you’re struggling to match affordability for the lender, it may be that we’d look for a product transfer, just until that company has got enough trading history to support a new mortgage.
There’s options there – so speak to us as early as possible. Rates can be reserved for up to six months in advance of your deal ending, so the earlier you speak to us, the better.
What happens to the limited company if I am unable to make mortgage payments on time?
If you fall into arrears, you could face potential repossession of the property. The key on this, and for any mortgage problems, is to speak to your lender at the earliest sign of difficulty.
Some people like to avoid having that conversation, but the best thing to do is just explain that you’re having problems. There’s a lot of protection measures put in place at the lender’s end – they look to try to avoid repossessions. That’s the last resort.
Any missed payments could affect your credit rating and eligibility for any future applications, as well. So talk to the lender at the earliest possible sign of trouble.
Can I transfer an existing mortgage held personally to a limited company if I become a company director?
You can if you’re transferring that asset into a limited company. You will often find that there is a stamp duty liability. Speak to your tax advisors about ways to avoid that. There’s very few, and normally there will be a tax liability. But yes, it’s possible in principle.
Are there any additional costs or fees associated with obtaining a mortgage as a limited company director?
On the residential side, typically we don’t see too much difference. If you were looking to purchase as a limited company entity, there are normally different costs involved. But that has its own features and benefits as well.
It’s down to your personal circumstances with residential. Not so much so for limited company purchasers for Buy to Let. You do tend to find there are some cost differences for that.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
For specialist tax advice, please refer to an accountant or tax specialist.
Approved by The Openwork Partnership on 02/01/2024.