A guide to mortgages for self-employed company directors

By its very nature, the self-employed lifestyle is apt to throw the odd curveball or three.

Nowhere is this more pronounced than when applying for a self-employed mortgage as a company director, writes John Yerou, CEO of Freelancer Financials.

That’s because neither your circumstances nor income fit into lenders’ neat little boxes. Many high street lenders still view company directors’ applications as ‘high-risk’ by default. It’s just one more challenge limited company directors face compared to permanent employees.

Averse to complexity

I hesitate to say that some mortgage brokers adopt the motto “Anything For an Easy Life.”

But, the truth is, your average ‘vanilla’ broker just isn’t set up for complex mortgage applications. Brokers that don’t specialise tend to lump company directors in with all their other self-employed clients and package their applications the same.

This won’t wash with a lender. Company directors, usually on the advice of their accountant, only draw the salary and dividends they need to get by. And why wouldn’t they? From a tax-planning perspective, this salary-dividend mix is great.

What happens if a high-street lender hears ‘self-employed?'

But, if a lender is told that the applicant is self-employed, they’ll only use those salary and dividend drawings to work out affordability. For most company directors, that approach is a travesty.

To avoid disappointment, company directors should find a broker who specialises in non-standard income. Specialists know which lenders to approach and how to highlight your true affordability as a limited company director.

Only by adopting this approach from the outset will you secure the competitive mortgage your income and status deserve. This guide will set out the template directors need to follow to achieve that aim.

Eligibility criteria

No universal standards or underwriting criteria for assessing the affordability and borrowing of a company director’s earnings exist.

Each bank or building society sets its own idea of ‘risk,’ which often leads to mainstream lenders treating company directors inconsistently.

If you’ve trawled the high street or call centres on your own, you’ll already have an idea of the wide variance of interest rates and terms they’ll offer you. That is; if they’ve even offered you a mortgage at all.

What makes lenders nervous about lending to company directors?

It’s not only brokers who give limited company directors wanting a mortgage short shrift.

Many lenders are hesitant to offer directors their best deals, too, especially company directors with multiple income streams.

It all comes down to risk, and what level of risk a lender apportions to your situation. The question lenders ask probably align directly with thoughts you’ve had yourself:

• How can I present a stable income?
• What documents can I provide to back this up?
• Do I have a long enough trading history to satisfy lenders’ criteria?
• What, exactly, counts as income for borrowing purposes?
• How much of my retained or secondary income should I present?

A specialist broker will know the answers to these questions on your behalf. This means they also know how to assuage lenders’ concerns and present your application in a positive light.

Stability is key to a successful limited company director mortgage application

Lenders’ underwriters know that if a ‘LTD’ company goes under, it leaves the director in a difficult legal position.

In comparison, they know a skilled full-time employee can potentially walk into a similar job should their current job disappear.

By comparison, a permanent employee would probably only have to have been working for a couple of months before getting mortgage approval. As a company director, a year’s trading is often the minimum qualification period, but many lenders may ask for two or three-years’ accounts.

In short, a company director has to prove that their company is robust enough to enable them to continue making their regular repayments.

A history of paying yourself a consistent salary and dividends will go a long way to convincing a lender you’re ‘good’ for the loan. Projections and evidence of ongoing projects can help lower a lender’s perception of risk even further.

Mortgages for company directors shouldn’t be taxing

So, we get it.

Most limited company directors pay themselves a low salary and restrict dividends. That’s the standard playbook move for reducing your tax bill with HMRC, but it’s awful when you’re looking to secure a self-employed mortgage.

And let’s not blame your accountant. They’re only looking to minimise what taxes you have to pay. But, by doing so, they present a substantial obstacle to your borrowing capacity.

Reducing your salary and drawings undermines what a lender is prepared to lend you. Most lenders’ typical lending criteria only compound this anomaly.

You need a lender that is also willing to look at retained profits, not just salary and dividends. Here’s why.

So, say you approach a high street mortgage lender. The first thing they’ll ask for is the two- to three-years’ accounts to ‘evidence’ your income.

According to these accounts, your income comprises only a low salary and dividends. It’s this combined figure most lenders use as the basis of their mortgage affordability calculations.

Any net or retained profits held within your business? They’re left off the table, doing you no good at all.

If you get offered a mortgage at all, it will be derisory. If they reject you out of hand, you’ll get a nasty mark on your credit file. Lose-lose!

How do I borrow with my retained profits?

There are only a couple of high street banks and specialist lenders willing to use net profits retained within the company for mortgage approval. This includes your share of the net profits (before corporation tax) plus your salary and even pension contributions.

If you can secure this type of borrowing, the lender’s mortgage offer will be substantially higher compared to using salary and dividends alone.

The reason why many high street lenders balk at using retained profit for assessing your affordability is this. Rather than see those profits as disposable income, it makes them feel better to see them as rainy-day funds.

Again, it all comes down to underwriters and their perception of risk. The more you can do to highlight sustainability, the better.

What about mortgages with only one year’s trading history and accounts?

As I mentioned, a handful of lenders will try to get you a mortgage as a company director with one year’s accounts.

There are a select few amenable to just 9-to-10-months’ trading history, but your profits must be astonishing if you’ve only been in business that long!

It becomes easier if you were previously trading as a sole trader and then switched over to a limited company structure. This proves to the lender a history in the industry upon which you want to base your application.

Mortgages and fixed-term Personal Service Company contractors  

Fixed-term contractors are, in a sense, special in that they have a whole method of underwriting devised just for them.

Personal Service Company (i.e. limited company) contractor mortgages is a subject to which we’ve committed many thousands of hours, talking to both lenders and underwriting teams alike, almost neverendingly!

We’ve helped lenders adopt contract-based underwriting, which we now more commonly define as ‘contractor mortgages.’

The method foregoes umbrella company contractor payslips or accounts. Instead, it helps lenders base contractor mortgage affordability on gross contract rate alone.

This way, everything is incorporated, no matter how much salary or dividends you draw from your limited company. Even better, once past the underwriting stage, contractor mortgages are no different than the spectrum of mortgages lenders offer full-time employees.

What documents do company directors need to apply for a mortgage?

While each lenders’ requirements may differ, there are three types of documents you will generally need to provide as proof of your income to secure your mortgage:

• Between one and three years of accounts, certified by an accountant.
• Business and personal bank statements – for the past three months.
• SA302s and tax overview from HMRC.

Not all brokers operate equally

As mentioned earlier, it would be remiss of me to say that all brokers / advisers put in the same amount of effort for directors of limited companies seeking mortgages.

It’s been our experience (based on client feedback) that some brokers come straight out and say that they’re unable to get mortgages for directors! You’ll know if you’re dealing with a specialist broker almost instantly. They understand the loops you have to go through. They inherently grasp the nuances accountants apply to directors’ finances.

Why company directors should always use a specialist mortgage broker...

Speaking for ourselves, we’ve developed partnerships with lenders' underwriting teams so that we can eradicate all ambiguity right from the beginning of a mortgage application.

These underwriters factor in your net and retained profits, as well as your salary and dividends. They know that those profits are left in your company for tax planning, not some fictitious ‘safety net’.

We also know how to package your application so that the relevant information and documentation are front and centre. Underwriters are busy people. They want the information straight away so that they can begin the process without having to go hunting for evidence of your income.

Highlighting what we know will help underwriters arrive at the best outcome for you; it doesn’t matter if you’re a newcomer or have multiple income streams. Removing what’s irrelevant leaves the path clear for all parties.

What legwork do directors need to do – once they have a specialist in their mortgage corner?

Any specialist broker worth their salt will, after an initial conversation, handle everything else for you -- from application to completion. All you’ll need to do is submit the necessary paperwork, then get on with what you do best: running a successful limited company business.

It can be even better if you use an independent mortgage broker. That means they have access to any lender’s company director mortgages, which should help your application get more readily accepted. Not only that, but their relationships and expertise can also help you secure the best deal for your unique situation.

You can then ignore that devil on your shoulder, who whispers ‘you should be paying less’ when you see your mortgage payment go out every month. It’s probably the biggest bill you have every month. You owe it to yourself to make sure it works for you.