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, that’s 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.
Lenders treat new limited companies unfavourably to be honest. They see the income stream as unproven and therefore most lenders want the company to have been trading for a minimum of 2 years and able to produce 2 years income evidence. Some lenders require 3 years, but not many. So to make the smoothest of transitions from employed to self employed it would be ideal to take at least a 2 year fix rate mortgage before you start trading as a limited company. You do get a couple of exceptions to the rule! A handful of lenders are comfortable with 1 year’s trading history. However these are mainly not high street lenders so rates can be higher. One exception is Halifax who allow 1 year trading history so long as it is a newly formed company and you have previous experience in the same line of work.
Lenders view company directors as a self-employed. Although you receive a salary from that company, as long as you own more than 20% of your company (25% in some cases), a lender will view your income as self-employed. The company needs to be registered in the UK with your income in GBP. Currently lenders don’t generally offer less money to you for being self employed compared to employed persons, however during the Covid pandemic some lenders were limiting the amount they were prepared to lend to self employed people, so this might start to happen again as we move into uncertain times for mortgages.
How lenders calculate income from limited companies for mortgages varies between lenders. The most common way lenders calculate self-employed income is to take an average of your last 2 years salary and dividends. A couple of lenders require 2 years trading history but will use the most recent salary and dividends for affordability. Using your net profits rather than salary and dividends is a good little trick when it comes to mortgages. Some lenders calculate your income from your share of net profits and your salary- often termed renumeration. The majority of these use your share of net profits after corporation tax, but some disregard the tax and take pre-tax profit. Most again will average the last 2 years, but one or two will use the latest year if it is higher. This is hugely beneficial as you don’t need to pay yourself higher salary and/or dividends (and pay more tax) for the sole reason to prove a higher income in order to get a larger mortgage.
If the reason that you set up or are setting up a limited company is that you are a contractor or operate under the CIS scheme then there are a couple of favourable loop holes to consider.
Some lenders allow contractors to use their daily rate as gross pay and they then use your contract as proof of income effectively treating you as if you were employed. This means they don’t even ask for the company accounts or use your taxable income. This allows you to run your limited company in the most tax efficient manner and still show a higher income for affordability. The lenders calculate income for day rate contractors by taking your day rate x by number of days worked x by 46 or 48 weeks (they do expect you to have some time off even if you don’t!). CIS contractors can use their CIS statements in the same manner an employed person would use pay slips. The lender will require 3 months CIS statements and will take an average of the annual income then use 48 weeks of it. The huge advantage is that you can use your gross pay and the company accounts are not used so trading history and taxable income is not needed.
Using these contracts, CIS or net profits does not necessarily mean higher rates. Many high street lenders allow us as brokers to use these contract values but they are unlikely to do this in branch. The rates you would receive are the same rates as if you were self employed or employed.
The documents required for self employed company directors to get a mortgage will depend on the lenders. Most lenders will ask for latest 2 years Sa302 (tax calculations) and tax year overviews. Lenders who look at net profits will require the latest company accounts. It is important to note that self employed income evidence is historic and lenders are uncomfortable using accounts or SA302s older than 18 months. As the tax year runs April to April this can mean that in October you would need to file the current year’s tax return even though the deadline is not until the end of January for the following year. Depending on your company’s filing year this can make using net profits and renumeration more attractive.
For day rate contractors they will require the latest contract with minimum of 3 months remaining and depending on lender and your experience look at your contract history and potentially your CV. Sub contractors are required to show 3 months CIS statements or 12 months depending on credit score.
Lenders will want to evidence the income being received in your business bank statements.
Overall getting a mortgage for a limited company gets a lot easier once you have 2 years trading history. You can still get a mortgage with 1 years trading but it limits the lenders we can approach. Its really important to review all of the ways we can evidence your income to understand the best and most tax efficient manner for you. That’s where using a mortgage broker is ultimately important to navigate the many ways different lenders view your income and their lending criteria.