Are you the director of your own limited company? Do you want to apply for a mortgage and wonder how lenders will view your income? Here’s the lowdown on how lenders will assess your earnings.
Working for yourself can offer many benefits, and it can be rewarding to be the owner of your own limited company. However, it can be a bit more challenging to get a mortgage than if you were employed by someone else. That said, it’s not impossible and with the right advice from a good broker, it can be done.
So how do lenders evaluate your income if you’re a limited company owner? ‘Some lenders use salary and dividends,’ says Shaun De Moura, MB Associates’ Senior Mortgage & Protection Adviser. ‘So that would be the money that’s been drawn out of the business after the net figures have been worked out.’
However, it can vary among lenders. Lenders may use several different methods to evaluate the income of limited company directors. Here’s a quick summary of what lenders usually look for…
1. Salary and dividends
Most lenders will consider the salary you pay yourself from your business, along with any dividends you draw from its net profit. Net profit is essentially what’s left in the business after covering expenses and paying taxes.
Lenders see salary and dividends as the most direct measure of the income you’ve accessed for personal use. However, this approach may not capture the full picture for directors who retain profits in their business for growth or stability.
2. Salary and retained profit
For directors who prefer to keep a larger portion of their company’s earnings within the business rather than withdrawing it as dividends, some lenders adopt a different approach.
Lenders will look at your salary in combination with retained profits – the earnings your business has amassed but has not been distributed to shareholders. ‘If somebody’s left a healthy net profit in the business and not drawn it because they don’t need to, some lenders will take a view that the money was still there for them to take if they needed to access it for whatever reason,’ adds Shaun.
3. Last two years’ financial history
Lenders will usually take a two-year view of your financial situation. They’ll review salary, dividends, and retained profit over this timeframe to calculate your accessible income.
This holistic approach can be a big plus if you’ve consistently left funds in the business rather than drawing them out. However, it also means you’ll need a clear and well-documented financial history for this period.
What if you only have one year’s worth of accounts? ‘Technically, there are lenders who can use one year’s accounts, but what they would then do is average that over two years,’ says Shaun. ‘So, they’re averaging whatever your figure is against a zero, which is unlikely to be a true reflection of how the business is performing, but it’s a cautious approach for lenders to consider using the income with only one year’s completed books which is still a positive to see.’
What about contract workers?
If you’re a contract worker applying for a mortgage, lenders would usually take your day rate and multiply it by five (days) and then again by anywhere between 46 and 52 weeks. ‘The majority of lenders use the 46 week-mark, and those who use 52 weeks will only use 80% of the income,’ says Shaun. ‘So, a general rule of thumb for contract workers is to take your day rate, multiply it by five and then again by 46 to find out what your income would be to a lender.’
Proof of income
Shaun says that lenders would also want to see your contract as proof of income and will be paying particular attention to the start and end date of the contract. He says: ‘They may ask for previous contracts, or if you’re within three months of the current contract ending, they may ask for written proof that it is going to be renewed.’
Lenders are more flexible
Overall, lenders are becoming more flexible in their approach to self-employed workers. ‘Larger lenders like HSBC and Barclays are getting better at lending to self-employed workers,’ says Shaun. ‘Some would say that self-employed applicants have been treated harshly over the years compared to employed applicants. An employed applicant can broadly take their payslip for the past three months, whereas self-employed applicants have to give much more information about what has happened and not so much about what is happening now. As a broker, we’ve got to use historical information for self-employed applicants.’
While getting a mortgage when you’re self-employed can be more time-consuming and detailed than if you’re employed, it is possible, and the advice of a good mortgage broker can really make a difference. We’re here to help if you need advice.