Specialist mortgages for limited company owners
When you start your own limited company, getting a mortgage can seem like quite a challenge. Not only do you need a deposit and to meet the standard affordability requirements, you also need to provide additional documentation and go through a more rigorous mortgage application process compared to those in salaried positions.
This is because, without the proof of a regular wage, it can be difficult to prove your income is sufficient and reliable enough to meet your mortgage repayments as a limited company owner.
However, there are a range of specialist mortgages for limited company owners. You just need to make sure you take the right approach to get your hands on one:
Focus on your net profits
Most limited company directors extract their income in the form of a salary at the basic rate and supplement this with dividends. You may also decide to leave a proportion of your money in your business for cash flow reasons, if you intend to reinvest that capital or you just want some extra cash for a rainy day.
However, most mortgage lenders will only look at your declared income (the combination of a salary and dividends) when assessing your affordability, but this approach may not truly reflect the money you earn.
For example, let’s say you pay yourself a total of £40,000 in dividends and a salary, which would give you the ability to borrow up to £200,000 (using the rule of thumb that you can borrow five times your earnings for a mortgage). However, your company actually brings in closer to £60,000 per year, but you decide to put aside £20,000 per year.
As a result, your income is closer to £60,000 and you should (using the same 5x rule) be able to borrow £300,000.
Thankfully, there are other approaches available in the form of specialist mortgages for limited company owners to help you overcome this issue.
Such specialist mortgage lenders base their underwriting decisions on the share of net profits that you have in your limited company. In other words, these lenders will look at the actual money your business is generating and include any money left in it when calculating the amount you can borrow.
As the previous example demonstrated, this can make a big difference to the amount you can borrow as a limited company director.
A further benefit of this approach is that you don’t have to draw out all the money in your business (and pay the necessary taxes on that amount) to prove your income. Instead, you can use your net profit to prove your affordability to a specialist mortgage lender.
For specialist mortgages for limited company owners, you will also need to provide at least three months of business and personal bank statements as well as one or more of the following documents:
- Finalised company accounts
- Self assessment (SA302) tax form
- Accountant’s reference
Deposits using company funds
If you intend to use your retained profit as your deposit money for your new property, be aware that this can be an issue for some lenders. This is because some mortgage lenders do not like to see large amounts of capital leaving a business at such a crucial time for your finances.
A supporting accountant’s reference may reassure the lender that this dip in funds will not affect your ability to operate as a limited company.
However, it may make more sense to move the your deposit amount out of your business and into your personal account a few months before your apply for your mortgage.
Specialist mortgages for limited company owners
To gain access to the best specialist mortgages for limited company owners, we would recommend that you enlist the services of a specialist mortgage advisor.
Not only can such advisors help you to save time and money, they will also protect your credit history from being hit by rejected mortgage applications.
Here are three of the basic mortgages available to contractors:
- Fixed rate: where your interest rate is set for a specific amount of time, so you will know exactly what you will be charged every month.
- Tracker: this will track the base rate of the Bank of England. So, your mortgage will move roughly with the performance of the UK economy. In other words, you’ll pay more when the times are good, and less than they are hard.
- Variable rate: this rate is determined by your lender as the “standard variable rate”, which is usually the cheapest initial rate - but it can increase at your lender’s discretion. If you can’t prove your affordability, you may want to consider asking a parent or family member to provide a guarantee on your mortgage against their own home.
You will also need to choose between the two different repayment models:
- Full repayments – where you repay the full value of your mortgage and your repayments also cover your interest. At the end of the mortgage term, this means you will have fully repaid your mortgage.
- Interest only repayments – this will only pay the interest charged on your mortgage. This is a cheaper option but it does mean you will never repay your mortgage, unless you sell your home, remortgage or save/invest wisely to eventually pay off your mortgage using a “repayment vehicle”.
Your choice depends on whether you want to pay your mortgage off in the fastest time possible, or benefit from cheaper monthly repayments now.
At Contractor UK, we’re committed to providing the best possible products and services for our readers and that is why we have teamed up with CMME; one of the UK’s leading mortgage specialists for contractors, freelancers, and business owners. Click here to find out more about their specialist mortgages for limited company owners.
