For business owners operating through a limited company, securing a mortgage can be more complex than for salaried employees. Lenders often view income from a limited company differently, requiring a thorough understanding of how this income is structured and documented. This guide will walk you through the key steps and strategies to increase your chances of getting a mortgage with a limited company income.
1. Understanding How Lenders View Limited Company Income
- Income Structure:
- Limited company directors often take a combination of salary and dividends, which can complicate how lenders assess income. Lenders will typically look at both components when evaluating affordability.
- Perceived Risk:
- Lenders may perceive limited company income as less stable than traditional employment, especially if the company is new or operates in a volatile industry. This perceived risk can lead to stricter lending criteria.
2. Preparing Your Financial Documents
- Two to Three Years of Accounts:
- Most lenders require at least two years of company accounts prepared by a certified accountant. These accounts should reflect consistent profitability and demonstrate the business’s financial health.
- Tax Returns (SA302 Forms):
- Lenders will often ask for your SA302 forms, which show your declared income to HMRC. These documents are crucial for proving your income level, especially if you’ve opted to leave profits within the company rather than taking them as dividends.
- Dividend Vouchers:
- Keep records of all dividend payments you’ve received from the company, as lenders will consider these alongside your salary.
- Bank Statements:
- Provide personal and business bank statements. Lenders may use these to verify your income, examine cash flow, and assess financial stability.
3. Maximizing Your Mortgage Application
- Pay Yourself a Higher Salary:
- If possible, increase your salary to enhance the income figure lenders assess. A higher salary can reduce the reliance on dividends, making your income appear more stable to lenders.
- Retained Profits:
- Some lenders are willing to consider retained profits in the company as part of your income. Ensure your accountant can clearly present this in your financial documents to demonstrate the business’s ability to support your mortgage.
- Reduce Debt:
- Pay down any outstanding personal or business debts before applying for a mortgage. A lower debt burden can improve your affordability assessment and increase your chances of approval.
- Improve Your Credit Score:
- A strong credit score can offset some of the risks lenders associate with limited company income. Ensure your credit report is accurate, pay bills on time, and avoid taking on new debt before applying for a mortgage.
4. Choosing the Right Lender
- Specialist Lenders:
- Some lenders specialize in providing mortgages to individuals with non-traditional income sources, such as limited company directors. These lenders often have a better understanding of how to assess company income and may offer more favorable terms.
- Mortgage Brokers:
- Working with a mortgage broker who has experience with limited company applicants can be beneficial. They can help you find lenders who are more flexible and can present your financial situation in the best light.
5. Understanding Lender Criteria
- Profit vs. Turnover:
- Lenders typically focus on company profits rather than turnover when assessing income. Ensure your accounts clearly reflect the company’s profitability.
- Loan-to-Value (LTV) Ratio:
- Be prepared for lenders to offer a lower LTV ratio if they perceive your income as less stable. A larger deposit can help offset this and may lead to more favorable mortgage terms.
- Industry Considerations:
- Some lenders may consider the industry in which your company operates. Businesses in stable, in-demand sectors may face fewer obstacles than those in more volatile industries.
6. Alternative Strategies
- Use of Personal Savings:
- If your limited company income is not sufficient for mortgage approval, consider using personal savings to increase your deposit. This can lower the LTV ratio and improve your chances of approval.
- Guarantor Mortgages:
- If you’re struggling to get approved, consider a guarantor mortgage. A guarantor with a stable income and strong credit history can provide additional security for the lender.
- Business Equity Release:
- If your company has significant retained profits, some lenders may allow you to release equity from the business to use as a deposit. This approach can enhance your financial standing in the eyes of the lender.
7. Common Challenges and How to Overcome Them
- Fluctuating Income:
- If your income fluctuates, present an average income over the past two or three years to show stability. Highlight any trends in increasing profits or dividends to reassure lenders.
- Recent Business Start-Ups:
- If your company is relatively new, consider waiting until you have at least two years of accounts before applying for a mortgage. Alternatively, seek out lenders who are more flexible with newer businesses.
- Income vs. Affordability:
- Lenders may focus more on affordability than income. Prepare a detailed budget to demonstrate your ability to manage mortgage payments alongside your other financial obligations.
8. Tips for a Successful Mortgage Application
- Work Closely with Your Accountant:
- Ensure your accountant is familiar with mortgage application requirements and can present your financial documents in the best possible way.
- Be Transparent:
- Be upfront with lenders about your income structure and business performance. Transparency can help build trust and lead to a smoother application process.
- Consider Your Timing:
- Apply for a mortgage during a period of financial stability, ideally after a profitable year or when your company’s accounts show consistent growth.
9. Conclusion
- Getting a mortgage with a limited company income requires careful planning and preparation. By understanding how lenders assess limited company income, organizing your financial documents, and choosing the right lender, you can increase your chances of securing a mortgage. Working with a specialist mortgage broker and maintaining a strong credit profile will further enhance your prospects, helping you achieve your homeownership goals despite the complexities of limited company income.