Being a limited company director can bring some extra challenges when it comes to applying for a mortgage. But getting a deal that works for you is not impossible. Here’s what you need to know.
Every company is different, which means high street lenders can treat company directors inconsistently. If you’ve already been looking for a mortgage deal, you might have been offered wildly different interest rates from different lenders, or you may have been turned away completely.
But it’s absolutely a realistic goal to get a mortgage, a second mortgage, or even a buy-to-let property as a company director. Most of the time, you just have to find the right lender.
What hurdles do company directors face when applying for a mortgage?
The other way to ask this question: what makes lenders nervous about lending to company directors?
It boils down to risk. Mortgage lenders are investing a lot of money in their customers over a long time, and they want to know that the money is going to come back. To them, the top of a company pyramid is a riskier place to be than a few levels down.
That’s because the job of the company director is so complex. We already know that many standard lenders aren’t geared towards offering mortgages to self-employed people, and directing a company can be an even more complicated and precarious position.
As always, when you’re applying for a mortgage, you’ll need to prove that you have a stable income and can reliably make your monthly payments. But when you’re the director of a limited company, this also means proving that the company’s income is stable enough that you can keep paying yourself a consistent salary, not just in the next few months, but for the term of your mortgage.
That’s because setting up a limited company means that you’re paying yourself a salary from a company that’s responsible for its own finances – you and your company are two separate financial entities.
What’s more, lenders know that if a company does go under, the director is in a difficult legal position. Whereas an employee might find it easy to walk into another job at a similar company, there are more repercussions for a director should the worst happen.
So what does this mean for you?
You’ll have to do more to prove that you’re a good applicant
If you’re a regular employee, you’ll probably have to wait until you’ve been working for around six months before you can be approved for a mortgage.
If you’re a company director, the minimum is usually one year of trading. And even then, you’ll probably have to show evidence that you’ve got ongoing projects – meaning future income. It’s also not unusual for lenders to want to look at three years of accounts before they make you an offer.
Lenders also know that your salary isn’t always an accurate depiction of how profitable and stable the company is. As well as all the usual documents to support your mortgage application, you’ll have to show them the bigger picture of your business and personal finances:
- Your accounts for 1-3 years
- Your SA302 year-end tax calculations
- Your business accounts statements for the last three to six months
- Your personal accounts statements for the previous three to six months
- A breakdown of your salary, dividend payments, and share of the company’s net profits after corporation tax
In most cases, you’ll also need to have the statements certified by an accountant.
Who can help you find the best deal?
1. A lender that looks at your most recent year of finances
If you can, find a lender who’ll do their affordability assessment based on your most recent tax year. That can get you a better mortgage deal, especially if your company is new or growing. Lenders who ask for three years of statements will take an average. And if they’re taking previous years or your start-up year into account, it might mean that you’re offered a smaller loan or a higher interest rate.
If your profits are growing, finding a lender that will concentrate only on your last 12 months of accounts can make a big difference.
2. A lender that looks at your share of the company’s net profit
Different lenders assess affordability for company directors in different ways. One of the most significant differences is whether they take your income as the salary you draw through PAYE or look at your share of the company’s net profit.
If your company is doing well and the lender makes their calculations based on the profits, you might find that more deals open up to you – with longer mortgage terms, smaller deposits, and lower interest rates more likely to be an option.
Remember, using a mortgage broker like Habito can save you a lot of time and stress here. We’ll search through 20,000 mortgages from over 90 lenders to find the one that suits your situation.
How much can company directors borrow?
So what does that mean for your mortgage? And particularly for the deposit you can expect to put down on your new home?
We have some good news here. If you find the right lender, there are a limited number of 95% mortgages for company directors (which means you’ll expect to pay a 5% deposit).
It’s admittedly more common to find a 90% or 85% mortgage (with a 10% or 15% deposit). To get the best terms on your interest rate, paying a higher deposit will really help.
Having said this, the larger the loan you’re applying for, the higher percentage you can expect to put down as a deposit. Again, it’s all about the lender doing what they can to mitigate the risk if the company goes under.
Can you get a mortgage as a company director with a poor credit history?
Getting a mortgage with a poor credit history is tricky for anyone, and company directors are no exception. It ultimately depends on how serious your credit problems are. If you missed a phone bill three years ago, it shouldn’t make too much of a dent. But having a CCJ against your name limits your mortgage options much more.
Likewise, if you’ve declared company losses in the last three years as a company director, getting a mortgage can be tricky. Lenders see declared losses as a red flag that there might be further problems in your future. You can expect to put down a larger deposit or make repayments at a much higher interest rate.
Remember that because your personal finances are ultimately separate from your company finances as a director, all our advice on improving your credit score still applies.
A note on getting a mortgage through a limited company
An alternative option for company directors is getting a buy-to-let mortgage through the company itself. This only really applies to buy-to-let mortgages, and the process can be complicated, but it does make sense as an option for some companies, especially SPVs (special purpose vehicles) which already deal in property.The reduced personal risk that comes from having your personal finances separate from those of the limited company also helps.
However, there are a few things to keep in mind.
- You’d have to pay corporation tax on the property, as well as stamp duty
- The mortgages are usually only available with a higher deposit of 25%
- You have to be able to prove that the rental income from the property is going to be significantly higher than the mortgage repayments.
We have more info on getting a mortgage through a limited company here.
Do you have more questions about getting a mortgage as a limited company director? The mortgage advisors at Habito can help.