Running your own company comes with many benefits, however one aspect which could be a little tricky is how mortgage lenders view company director mortgage applications. Lender’s criteria can vary quite wildly, so in this short overview we explain how much company directors can borrow and give you the opportunity to apply for a decision in principle.
How much can I borrow on a mortgage as a company director?
How much company directors can borrow on a mortgage will vary between lenders. All lenders will assess the maximum mortgage amount based on income, but each has their own way of calculating what the true income and outgoings are before making a mortgage offer. The amount can range between 3.5 and 5 times annual income.
Mortgage lenders will look at not just how much you earn as a company director, but also what your outgoings are. They want to make sure that you can afford to pay the monthly mortgage repayments.
However, whilst all lenders now take a holistic view of your finances, how they calculate how much a company director can borrow will vary. Lenders recognise that your salary as a company director might not be a true reflection of how much you can afford to borrow on a mortgage… particularly if you’re paying yourself a lower wage but drawing on dividends.
Here are some examples of how different lenders calculate the maximum mortgage amount a company director could borrow.
Examples of company director borrowing amounts
Mortgage lenders typically let company directors borrow a multiple of your earnings. Those multiples can range from between 3 and half to 5 times your income. It’s not always that simple though, as how each lender calculates your income will differ.
Lenders will also look into your credit history. If you have bad credit you will probably be offered a lower amount to borrow as can be deemed riskier to lend to.
Most lenders who offer mortgages to company directors will fall into 3 categories.
The first category, Lender A, will only consider income paid as PAYE earnings. The second, Lender B, will also include income taken as dividends, and the third, Lender C, will take a full view of the company accounts and potentially add back in expenses that they consider to be “one off” or “discretionary” such as lump sum pension contributions.
Lender A
Lender A is a very cautious lender but will still be prepared to loan to a limited company director. In this example the company director earns a £30,000 income, takes £20,000 of dividends, and pays £10,000 a year into their pension from the company.
- Salary: £30,000
- Dividends: Ignored
- Pension Contribution: Ignored
- Total Allowable Income: £30,000
Lender B
In this example the lender could let a company director borrow more on a mortgage. They will let the director submit the PAYE element of their salary and the dividend income that has been drawn from the business.
This case sees a limited company director being able to borrow more versus with a lender who is only assessing their salary income by itself.
- Salary: £30,000
- Dividends: £20,000
- Pension Contribution: Ignored
- Total Allowable Income: £50,000
Lender C
And lastly, some company directors can borrow from mortgage lenders who look at the entire financial situation. These lenders are prepared to delve into limited company accounts and work with company accountants to offer potentially larger mortgage amounts.
One scenario might be where a limited company director has made a large voluntary contribution to their personal pension, which could otherwise have been taken as income.
In this scenario there are lenders that would include this payment back into the director’s income. This realistic approach would allow the most generous mortgage advance.
- Salary: £30,000
- Dividends: £20,000
- Pension Contribution: £10,000
- Total Allowable Income: £60,000
As you can see in the above examples there is a big difference in how much a company director can borrow on a mortgage depending on which lender that apply to.
How exactly can you make sure you apply to right lender?
Specialist Mortgage Online has a panel of expert lenders with years of experience in helping limited company directors get the mortgage deals that are truly reflective of their ability to repay… click here to find out more.
Handy Hint: For a more comprehensive guide on company directors’ mortgages, click here to find out how you can qualify and how best to prepare your application.
Proving your income as a company director
Most mortgage lenders will want a company director to provide the following before approving their mortgage application:
- Full and finalised company accounts.
- SA302 year-end tax calculations
- Possibly up to 2 or 3 years’ worth of financial information.
How much deposit do company directors need?
Now you have a better understanding of how a company director’s mortgage amount is calculated, you should also consider deposit amounts. The larger your deposit, the less you might have to borrow as a company director – it can help you get a better deal sometimes.
There are some lenders who will let a company director take out a mortgage with as little as 5% deposit. This is a 95% mortgage and will mean your lending options will be limited – most lenders prefer to have at least 10% as a deposit before lending to a director.
The higher deposit you have, the better deal you should be able to get.
What to do next…
Finding the right mortgage as a limited company director can be a minefield. Due to the complex way in which you might need to collate and present your proof of income, it can pay to work with a specialist advisor.
Our advisors understand the market and can offer you free initial advice by just answering 5 simple questions.
