Setting up a new limited company is a big decision so with regards to mortgages is important you try your best to get the timing right.
In a perfect world you would have arranged your mortgage before making the jump from being employed to self employed or changing your self employment structure from sole trader to a limited.
However, thatโs not always possible for a multitude of reasons. In this blog I will explain how lenders view limited companies and your income as a company director. I will also give you some tips on how to get the best mortgage as a limited company director.
How Lenders View New Limited Companies
To put it frankly, lenders tend to be cautious when it comes to newly formed limited companies. They often view the income stream as unproven. As a result, most lenders require:
- A minimum of 2 yearsโ trading history
- Two yearsโ worth of income evidence
Some lenders may even require 3 years, although thatโs less common.
Timing Tip
If youโre planning to set up a limited company, itโs wise to consider securing a 2-year fixed-rate mortgage beforehand. This makes the transition smoother.
Exceptions to the Rule
A small number of lenders are willing to accept just 1 year of trading history. These are typically not high street lenders, so interest rates may be higher. A notable exception is Halifax, which may accept a one-year trading history provided:
- The company is newly formed, and
- You have prior experience in the same field.
Self-Employment Status for Directors
Even though you may receive a salary, if you own more than 20% of your company (25% for some lenders), you are considered self-employed for mortgage purposes. Your company must be:
- Registered in the UK
- Paying your income in GBP
Currently, there is no general penalty for being self-employed in terms of loan amounts. However, during uncertain economic times (such as during the COVID-19 pandemic), some lenders have imposed tighter restrictions.
How Lenders Calculate Income
Lenders assess limited company director income in various ways:
1. Salary and Dividends (Most Common)
- Average of the last 2 years’ salary and dividends
- Some lenders may allow the use of the most recent year if it’s higher
2. Net Profits and Salary (Remuneration)
Some lenders will consider:
- Your share of the net profits (either after or before corporation tax), plus
- Your salary
This method can be more tax-efficient, as it may allow you to qualify for a larger mortgage without increasing your personal income and tax liability.
Special Considerations for Contractors and CIS Workers
If your limited company was set up because you are a contractor or operate under the CIS (Construction Industry Scheme), there are additional options.
Contractors
Some lenders allow you to use your day rate as a gross annual income. They calculate affordability based on:
Day rate ร number of working days per week ร 46 or 48 weeks
This effectively treats you like an employee. No company accounts or taxable income are required.
CIS Contractors
Lenders may accept CIS statements as proof of income, similar to how payslips are used for employees. Typically, they require:
- 3 months of CIS statements
- Annualised income averaged over 48 weeks
This allows the use of gross pay, with no reliance on company accounts or trading history.
Will This Affect My Mortgage Rate?
Using contracts, CIS, or net profit-based methods does not necessarily mean higher rates. Many high street lenders work with brokers to offer these solutions, though you may not find the same flexibility if you walk into a branch directly.
Rates offered are usually on par with those for employed or traditionally self-employed applicants.
What Documents Will I Need?
Documentation requirements vary by lender, but generally:
For Self-Employed Directors:
- Latest 2 yearsโ SA302s (tax calculations)
- Tax year overviews
- If using net profits: latest company accounts
Note: Lenders prefer income evidence less than 18 months old. Because the UK tax year runs April to April, you may need to file your return early (e.g. in October) to meet this requirement.
For Contractors:
- Latest contract (minimum 3 months remaining)
- Possibly your CV and contract history
For CIS Subcontractors:
- 3 to 12 months of CIS statements, depending on your credit score
In All Cases:
- Business bank statements showing income received
Getting a mortgage as a limited company director becomes significantly easier once you have 2 yearsโ trading history. While itโs still possible with only one year, the choice of lenders is more limited.
Itโs essential to review all the ways your income can be evidenced to find the most suitable and tax-efficient method. This is where working with a mortgage broker becomes invaluable. We help you navigate the varied criteria lenders use and match you with the best solution for your unique circumstances.
