Owning a company can be hard enough, being pulled in all directions, staff management, cash flow, accounting, not to mention doing your day job at the same time! So, it’s unlikely you’re going to have the time and energy to research getting the best mortgage for yourself.
This blog will point you in the right direction and let you know some things you probably weren’t aware of when it comes to getting the best mortgage as a company director.
Let’s start with timings, most lenders (I’m going to say most quite often throughout this because there are always some exceptions) will only use figures that are less than 18 months old. So, there are some key dates to think about. If you are using tax year income you only have until October the following year before you need to update your accounts. This is a few months before you are required to do it by HMRC but if you want a mortgage you need to do it early. Some lenders though, will use your trading year, so that time will obviously vary but the same 18-month rule usually applies.
How many years’ accounts do you need?
There can be confusion around how many years accounts you need to get a mortgage. Some directors think that three years are needed and, whilst there may be the odd specialist lender that might like that, the normal requirement is only 2 years.
There are two main types of lenders we need to think about next; those that take your salary and dividends and those that take your profits into account when assessing how much you can borrow. Let’s think about salary and dividends first. For most people I speak to, they assume that this is the only option, but the truth is far from it! Most lenders will average your last two years income or if your income has gone down, they will use the latest. There is at least one mainstream lender though, that will just use your latest year of income so if you have taken more income in the most recent year, that can make quite a big difference for you verses averaging the last two.
There are some other lenders that will look at your profits and from experience, not many company directors expect to be able to use their company profit, but it is possible. There are also a few lenders that will look at the salary you have paid yourself plus the net profit of the business. This works well if you pay yourself what you need each year but leave extra money in your business. Afterall, if you take it out you have to pay personal tax on the income. Lots of directors are in this position, where there is money being left in the business and lenders won’t lend them what they require.
So, with this in mind you could use a different lender that would consider your net profit, it is there if you wanted to take it out, so it makes sense to use it. There is also a lender that will use the gross profit so that can make a really a massive difference compared to your salary and dividend a lot of the time. There can be a massive difference in what each lender will lend you when you own your own company. The gap isn’t often as big for sole traders or employees, so it is particularly important for company directors to get proper advice from a qualified expert.
Do ensure that you seek advice from a reputable, qualified mortgage broker and make sure they are familiar with the big differences between different lenders and are able to talk to you about your options.
With these different options available, you may be interested in getting some ideas about your true affordability. To do this you will need a few different figures; your tax year salary and dividends, your trading year salary and dividends as well as your trading year net profit, all for the last 2 years. That sounds quite a lot of information to gather but you can usually get your accountant to provide you with those numbers. It doesn’t need to be as complex as it might sound.
I hope you have found this blog useful and hopefully it will be the difference for you like so many others, between the mortgage you want and the mortgage you think you might get.
If you have any questions or want to arrange a completely free strategy call with us to plan out your affordability, click here to go straight to our calendar and book a time to suit you. Or alternatively call us on 0300 124 5630 and we’ll happy answer your questions.