Do I need a minimum number of years trading to get a director mortgage?
In most cases, your business will need to have been trading for at least one year. Exceptions do apply; for example, medical professionals who have contracts in place to prove their future income may be able to secure a mortgage with shorter trading history.
Lenders will often wish to see a set of accounts for at least one year.
Still, if your trading period doesn't fall into the tax year - which is expected - some providers will be happy to see management accounts across a rolling twelve-month period.
That option is preferable rather than waiting until the end of the current tax year before making an application.
How Much Deposit Do I Need For a Limited Company Director Self-Employed Mortgage?
Deposit requirements depend on lots of factors.
If your application has any higher risk elements, such as having adverse credit or finding it difficult to prove your income, you might be asked for a higher deposit value.
As a rough indication:
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Standard company director mortgage applications
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5% deposit minimum - maximum 95% Loan to Value ratio
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More complicated applications with a niche mortgage provider
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Usually a 15% deposit minimum - although some specialist lenders might consider lending up to 95% LTV
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Provided you meet the lender's eligibility criteria, the deposit requirements are relatively similar as for any other kind of mortgage, usually with the maximum lending being at 95% LTV (i.e. 95% of the value of the property).
If you have a larger deposit of 15% or more, you have an increased number of niche lenders to choose between. This can be useful if you have any complications, such as bad credit history, and the deposit required in that case will depend on how recent the issues were, and the surrounding circumstances.
How Much Can I Borrow Based on a Self-Employed Net Profit Mortgage?
Maximum mortgage values will depend on the individual lender's policy, but there are typical LTV caps we can consider to get a rough idea:
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Average Maximum Loan
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Maximum LTV Ratio
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Up to £570,000
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95%
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Up to £750,000
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90%
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Between £750k and £1 million
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85%
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Between £1 million and £2 million
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80%
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Between £2 million and £5 million
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70%
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Over £5 million
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Around 50%
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How do mortgage lenders calculate affordability for company directors?
Standard income assessment bases have changed, with many lenders focusing on affordability as the key criteria over and above multiples of your average annual income.
Many lenders will set a cap, stipulating the maximum they can lend, depending on how much you earn.
Average maximum lending caps are:
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Directors with good credit ratings
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Up to five times your annual income - sometimes more depending on other circumstances.
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Directors with an adverse credit history
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Up to 4.5 times your annual income, and sometimes up to five times your earnings, depending on the reasons for the bad credit history.
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What earnings constitute income for a self-employed director mortgage application?
Every lender has a different set of criteria, so you might find that the amount they can offer to lend varies significantly between mortgage providers without knowing which lenders to apply to.
Calculating Income for a Self-Employed Net Profit Mortgage
The type of director you are will impact how your income is assessed. This could be:
- As a sole trader running your own business
- As a partner in a partnership business
- A director of a limited company
Here are some typical calculation methods that mortgage lenders will use when working out what income they consider declarable:
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Type of business owner
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Income figures used in the affordability assessment
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Sole trader
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Your net profit
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Partnership
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Your proportion of the net profit
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Director of a limited company
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Your salary, with most lenders including dividends. Some specialist lenders will also consider your proportion of the company's net profit based on your shareholding.
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Many directors will work with an accountant, and implement their recommendations to mitigate their tax liability.
For example, it is commonplace as a director to leave retained profits in the business, rather than drawing them as personal income. The benefits are that:
- You avoid paying tax on income that can be left in the business.
- You provide retained funds to support ongoing business growth.
However, this practice means many lenders will reduce the maximum they can lend to you and consider only your salary and dividends drawn without considering the earnings you have chosen to leave in the business.
That means that if you are the sole director and owner of a company that made a net profit of £200,000 but decided only to take a £40,000 salary, that only the £40,000 income will be considered in your mortgage assessment.
In this situation, specialist mortgages for self-employed directors become more crucial. It is vital to work with a broker to ensure you work with lenders who will consider your total earnings when deciding what they can lend.
Director Dividends When Self-Employed Applying for Mortgage Borrowing
Dividend income is taxed at a lower rate than net profit or a salary, so many directors draw earnings from their businesses in this way.
If you seek a higher value mortgage, you need to ensure you work with a lender who can consider your dividend income in their affordability calculations.
Retained company profits and the impact on company director mortgages
Revolution Brokers work with niche lenders who are happy to consider company profits earned and include the retained income you have chosen to leave in your business.
For example, in the above illustration, a specialist mortgage provider might base your affordability assessment on an income of £200,000.
This calculation has a substantial impact on your ability to borrow, with some indicative examples shown below:
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Mortgage provider
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Eligible income
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Declared income taken into consideration
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Maximum mortgage value available
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Mainstream lender
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Salary and dividend income
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£40,000
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£200,000
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Specialist lender
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Your share of the company's net profits
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£200,000
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£1,000,000
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This same scenario applies both to newer and smaller businesses and to larger companies that have been established for several years.
In the first years of a company's formation, many directors minimise their drawings and leave as much profit as possible to help it grow.
Suppose you are unaware of the potential to use your share of your company's net profits to support a mortgage application.
In that case, you might not be able to borrow the amount you wish or might choose to take cash from the business that you would have preferred to leave in situ.
Proving Directorship Income When Self-Employed Applying for Mortgage Borrowing
Every mortgage lender will want proof as to how much you earn, and may have different policies about the documentation they can accept.
The primary pieces of information required are:
- Filed company accounts
- Your self-assessment tax return (SA302)
- A reference from your accountant
- Business and personal bank statements from the last three months
How can I apply for a company director mortgage if I have an adverse credit history?
With any kind of mortgage, the lenders you can apply to are reduced if you have a bad credit history - however, this all depends on when and why the issues occurred and how serious they were.
As an idea, here are some of the most common bad credit issues, and how long should have passed since they appeared on your credit file before a mortgage lender will be able to consider your application.
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Credit issue
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Within the last year
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One to two years ago
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Two to three years ago
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Three to four years ago
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Over four years ago
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Late payments
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Yes.
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Yes.
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Yes.
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Yes.
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Yes.
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CCJs
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If less than £1,000.
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If less than £2,500.
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Yes.
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Yes.
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Yes.
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Defaults
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If less than £1,500.
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Yes.
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Yes.
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Yes.
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Yes.
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Debt management plans
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Yes.
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Yes.
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Yes.
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Yes.
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Yes.
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IVA
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Probably not.
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Possible, with a 25%+ deposit.
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Possible, with a 20%+ deposit.
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Probable with a 20%+ deposit.
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Probable with a 20%+ deposit.
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Bankruptcy
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Possible, with a 25%+ deposit.
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Possible, with a 25%+ deposit.
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Possible, with a 25%+ deposit.
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Probable, with a 10-15% deposit.
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Yes, with a 10%+ deposit.
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Can company directors get a mortgage if their business has made a loss recently?
If your business has declared losses in the last three years, securing a mortgage from a high street lender becomes much less likely. A loss-making company indicates a higher element of risk.
Should your business have made a loss in the last trading year, many lenders will be unable to offer you a mortgage.
However, if your income is made up of a salary, and this is deducted before the profit figures, you might be able to secure a mortgage if you can provide context and the underwriter approves your application.
For businesses making a loss two years ago and having since recovered, it is more likely that your lending application will be approved.
If you have made losses three years ago and can prove an upward trend of recovering from those losses, you have a more comprehensive number of niche lenders to choose from.
Can I get a director mortgage if I have a broad investment portfolio?
Many directors believe that having an extensive portfolio will make them a more viable mortgage applicant - but this isn't necessarily the case.
Landlords are essential applicants who may have multiple investment properties making up an extensive portfolio.
If you have multiple assets and numerous loans or mortgages, this can be a negative as all your income and outgoings need to be included in the affordability assessment.
Some lenders also have caps on debt exposure they can offer, so even if you make significant profits, they might not be able to lend if you have large mortgages elsewhere in your portfolio.
Director mortgage affordability calculations
If you would like a mortgage to purchase a new residential property, and have an extensive portfolio, you will usually be asked for:
- Details of all your existing mortgages.
- Information about property rental income.
- A full overview of your portfolio.
Where your mortgage payments are covered by rental income of 125%, then the mortgage is considered self-financed by the rent, and therefore should not impact your affordability assessment.
For example, if your mortgage payment is £1,000 per month, and the rental income is at least £1,250 per month, the investment is self-financing.
If you have mortgage payments that are not paid for by rental income, this can have a detrimental impact on your affordability, and limit the amount you can borrow.
Some niche lenders will be able to help even in these circumstances, provided the new mortgage application complies with their affordability criteria.
Large debt values and landlord mortgage applications
As a risk mitigation strategy, many lenders will set limits on how much debt you can have, and still be approved for a new mortgage.
Some lenders set this cap at £1 million, others at £2 million, and others do not have a limit at all.
You will also find that related financial institutions will have limits on how much they can lend to any one individual. That means if you have a mortgage of considerable value with a particular bank, that same bank cannot lend you any more under any circumstances. However, an alternative lender might be happy to approve your mortgage application.
Multiple mortgages and portfolio landlord affordability calculations
Many lenders will also have a policy that limits how many mortgages any one applicant can have. For example, you might be turned down for a new mortgage if you already have five mortgages.
The cap changes with each lender - this could be ten mortgages, or 12, and some lenders with a specialism in the property investment sector might not have a limit, but instead look to ensure those mortgages are all in good standing.
Is There a Self-Employed Income for Mortgage Minimum in the Last 12 Months?
Mainstream lenders will typically look at your average income over the last two or three years to arrive at a maximum they can lend to you.
This scenario can be a problem for directors whose business has grown significantly in the last year. The trading from earlier periods will bring down their average income and restrict how much they can borrow.
As an illustration, here is an example of a company's profits and how the maximum mortgage value might change between lenders:
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Trading year
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Net profit
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2020
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£50,000
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2019
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£10,000
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2018
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£10,000
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If a mortgage lender calculates an average over the last three years, this will come to £23,333. However, if they only use the most recent year to indicate your profits, the value will be £50,000.
A typical calculation is to take your income and multiply it by five times to reach a maximum mortgage value.
Lenders using the three year average will be able to lend up to £116,665, but lenders considering only the last year of trading can lend up to £250,000.
If you wish to apply for a mortgage based on your last year of trading, it is essential to work with a specialist broker who can identify the right lenders to apply to.
Can I remortgage to raise capital for my business?
As a director, if you have equity in your home and want to borrow against it, to inject capital into your business, or invest in something else, you might find this a tricky process.
Many lenders will only remortgage to raise capital for a limited number of purposes, such as:
- Consolidating debts
- Renovations or home improvements
- Buying a car
- Covering an expense such as a wedding or holiday
Typically, it can be much harder to remortgage a home to raise finances for a business, and you must work with a specialist lender in these circumstances.
With this sort of provider, you can usually borrow up to 85% LTV, depending on meeting the affordability criteria. This is even possible for directors who have an adverse credit history.
Does changing my business trading style impact my ability to get a mortgage?
Lots of businesses will change their trading style at one stage or another. For example, it is common for a sole trader to incorporate their business as a limited company, as the trade starts to build and grow.
If you have recently incorporated and have not yet finished your first year of trading under your new structure, you might find it very difficult to secure a mortgage from a high street lender.
Most providers will not consider the history of the business, and will therefore demand two to three years of accounts before they will consider lending. This applies to most types of business and mortgage, because, as a director, they will need to know your income and the stability of the company to calculate affordability.
This same frustrating scenario can apply to directors who have been running the same business for a decade and have recently decided to change their trading style.
In this sort of scenario, the best solution is to contact Revolution Brokers. We work with a vast network of expert lenders and can negotiate the income calculation basis to ensure that the complete picture is taken into consideration.
Whether you are a self-employed director, a shareholder of a limited company, or have struggled to find a mortgage as a small business owner, the Revolution Finance team is on hand to help.
For tailored advice about company director mortgages and getting your application started, contact us at [email protected] or call us on 0330 304 3040.
