• Jonathan

Can I get a mortgage - I own a company



Lenders are looking at income to calculate how much they are going to lend to you. Where you are employed ie PAYE then it is pretty simple. Slightly more complicated where you are a shareholder of a business ie you own part or all of the company.


These rules will only apply where you own at least 25% - 30% of your company. If you have a smaller shareholding then the lenders will treat your income (salary and dividends) in the usual way.


Let's deal with your employment first of all then we'll tackle the shareholding aspect.


If you are a director and shareholder then you will be employed by the company. You would be surprised at how many people who are sole directors of a limited company that does not appreciate that they are also employed by the company. If you are a director and are therefore employed then it is likely that you will be getting a salary. For many directors/shareholders, they take a low salary and larger dividends as this is generally advantageous for tax purposes (I'm the mortgage guy, not the numbers guy so go and speak to an accountant for clarification on that point). The lenders will take into account the salary when calculating the affordability.


That's the easy part!


If you are declaring dividends then you will be able to use these to put towards your income to be calculated for affordability. The lender will want to see what is know as the tax calculation so it's back to the accountant to ask them for the tax calculations and tax year overview. But don't ask them for the most recent year. No, you will need to ask them for the last two years. Most lenders will need to look at figures for two years - I'll come to that later.


The tax calculation will lay out your total income and make reference to the salary that you receive as a director, the dividend that you have drawn in that tax year, and any profit that you have earned from any rental property - this will be under a heading of Land and Property. Generally, lenders will not take into account any income from Land and Property so be warned.


If there is a delay in getting the income information in the form of tax calculations then this will delay getting a Decision in Principle and ultimately your mortgage.


Do not get confused between the accounts of your business and the personal tax calculations. Whilst the accounts add some meat to the bones, it really is the personal tax calculations that the lenders are after. They want to know how much you are getting paid and drawing in dividends not the overall state of the company but sometimes they will ask for the accounts which we can download anyway from Companies House.


The tricky part!


As I said early, most lenders want to see how you have been getting on over a two year period and will be looking specifically at your dividend drawings. Very few lenders will look at traders who have only been trading for a year but there are High Street lenders who will look at that. So make sure that you have two years of tax calculations and tax year overviews.


There are two scenarios that you will face


You took more dividend this year


In this case, the lender will average out your dividend drawing over the two year period and use this when they are calculating how much they are going to lend to you.


This year £25,000

Last year £20,000

Average £22,500


You took more dividend last year


In this case, then the lender will only use this year's drawing and will not average the two years out. This is not too dramatic as long as you are taking a similar level of dividend on an annual basis but can be problematic if you have had a bad year, decided not to take dividends because you did not need them, or bought machinery/stock thus reducing the profit


This year £20,000

Last year £25,000

Use - £20,000


Consequences


Buying a resi property as a director of a company means that you need to be more organised and have planned ahead. Taking income by way of dividends may be tax-efficient but with that, you lose the flexibility as the lenders are looking at historical figures that can be more than 12 months old. Lenders will ask for accountant references to get an idea of the current state of the company but that is really just to back up the historical figures. It is unlikely to be able to be used to demonstrate a director's ability to take more dividends.


There is a caveat to that and that is retained earnings. One of the reasons for doing the low salary/dividends model is that you have a degree of flexibility on your tax affairs ie. you can keep money in the company as retained earnings and therefore be taxed at Corporation Tax levels. The good news is that there are some lenders who will look at your salary and the retained earnings in the company. However, you have to have the controlling interest in the company and the ability to be able to draw your share of the retained earnings without recourse to other shareholders.


So if you are a director and considering buying a property you need to work out how much you can borrow. Finding out that figure must be the first thing that you look at. Many company owners have set up their business to be as streamlined as possible for tax purposes. Whilst this means personally you will pay less tax the likelihood is that you will be declaring less income. Not good when it comes to getting a mortgage. Remember - lenders like income.


Happy to have a chat about your circumstances. If you think that would be beneficial then get in touch



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