Limited company director mortgages: why salary and dividends aren't the whole story

The conversation you've probably had with your accountant

If you run your money through a limited company, you've probably had this chat with your accountant.

Keep your salary low. Take dividends when the business can afford it. Leave as much profit in the company as you can. Pay less tax.

Perfectly sensible. Then you go to your bank for a mortgage. They look at your salary, look at your dividends, add the two together and tell you that you can't borrow what you need.

You know the business is doing well. Your accountant knows the business is doing well. The bank, apparently, does not.

The issue may not be your income at all. It may be that the lender you asked looks at it in a way that doesn't suit how you're set up.

How high street banks tend to look at director income

High Street banks typically assess a limited company director much like an employee. They look at what you've taken out of the business, add up your salary and dividends, and use that figure to work out what you can borrow.

That works well if you take a healthy dividend every year. But plenty of directors deliberately keep dividends modest, particularly while building a business or in years when they've reinvested heavily. The books look great. The mortgage offer doesn't.

That isn't a reflection of your financial position. It's a reflection of how that particular lender does its sums.

Three ways lenders look at director income

Not every lender uses salary plus dividends. Broadly, there are three approaches.

Salary plus dividends

The usual High Street approach. The lender adds your PAYE salary to the dividends you've declared in the tax year. Simple, but it can undersell directors who keep dividends low.

Salary plus your share of net profit

Some lenders look at your salary alongside your share of the company's net profit, whether or not you've drawn that profit as a dividend. That gives a fuller picture of what the business earns and what you could draw if you chose to.

Salary plus net profit before tax

A smaller group go a step further and use your salary plus your share of the net profit before corporation tax. It's the more generous of the three, and it can make a real difference to what you can borrow if the business keeps a healthy profit.

Which approach fits you depends on how your accounts are put together, how long you've been trading and what your accountant has prioritised. It's worth understanding before you approach any lender, and it's the heart of what I cover on the business owners and directors page.

What lenders typically ask for

Whichever route suits you, lenders generally want to see:

• Two years of finalised company accounts (some lenders will work with one)
• Two years of SA302 tax calculations and tax year overviews from HMRC
• Three to six months of personal and business bank statements
• Proof of your shareholding in the company
• A reference from your accountant (some lenders ask for this, not all)

If your accounts are prepared by a qualified accountant and show a clear, steady trading history, you may be in a stronger position than you think. The trick is finding a lender whose criteria fit your circumstances, rather than bending your finances to fit a lender that was never set up for you.

What about profit you've left in the company?

This one comes up a lot. You've got profit sitting in the business that you haven't drawn. Will a lender count it?

Honestly, it depends on the lender. Some will take retained profit into account, particularly where there's a solid track record and the figures are consistent across two years of accounts. Others won't.

Even where it isn't counted as income, retained profit generally reassures a lender about the health of the business. It shows you aren't drawing out every penny and that the company has reserves, which matters when an underwriter is weighing up risk.

The mistake I see directors make

They go straight to their own bank.

It makes sense on the face of it. You've banked with them for years. They can see your accounts. Surely they'll understand.

In practice, a bank's mortgage team tends to apply its usual income rules whatever the relationship. Your business account isn't automatically part of the mortgage decision, and even when it is, the criteria don't tend to bend.

Your own bank might well be the right answer. It just might not be, and you won't know until someone has looked at how other lenders would treat the same figures. A broker who works with director income can compare your options across a comprehensive panel of lenders, not just the one you bank with.

Will applying for a mortgage affect your tax?

Directors sometimes worry that applying for a mortgage will change their tax position. A mortgage application works from the figures already in your accounts and tax returns. Applying doesn't change them.

What's worth avoiding is changing how you pay yourself purely to get a mortgage, such as bumping up your salary or declaring a bigger dividend just before you apply. That can have tax consequences, so speak to your accountant before changing anything. A sudden change can also affect how lenders read your income history, which is another reason to talk it through first.

Every director's situation is different

There's no one answer, because lenders don't all work the same way. Two directors with the same profit can have quite different options depending on how their accounts are structured, whether they're the only director or one of several shareholders, and whether they have income from elsewhere.

The starting point is knowing your own numbers: your salary, the dividends you've taken, your net profit over the last two years, and what your latest accounts show. If you'd like a quick sense of where you stand first, the Mortgage Ready questionnaire takes about three minutes.

From there, it's about matching those numbers to a lender that fits. That part is my job, and you can book a call whenever you're ready.