If you had a more typical job, a 9-5 working for a big corporation, it would be much easier to prove your income and employment during the mortgage process. But when you own a business, getting a home loan can be tricky.
As a side-effect of the subprime mortgage crisis of the late 2000s, we saw tighter regulations with the aim to prevent lenders from exploiting high risk borrowers to make a quick buck. Back then it was much easier for borrowers with good credit to receive a loan just by stating their income and assets, this in turn made it much easier for small business owners with more complicated incomes to obtain a loan.
Unfortunately as this system was so badly abused, today potential new home owners applying for home mortgages are now required to provide up to three years worth of documentation about their finances. As a result, entrepreneurs and business owners may well consider the journey to home-ownership a hurdle-laden path, perhaps true when previously the only lenders were those high street banks that had cornered the mortgage market.
In the following article we touch on a few of the most common hurdles business owners may face. Lender policy on income requirements varies widely across the market and can be quite complex however, not every lender offers product suited to a wide range of people and not every broker has full sight of what’s currently available. It doesn’t mean home ownership isn’t available to you.
It may well be a high street bank that ends up providing you with a mortgage, but there’s a much bigger market out there willing to lend, so getting the right advice and shopping around is the best way to ensure you secure the best deal for your needs.
Mortgages for limited company directors are easy to obtain if you know where to look. Company director mortgage requirements in particular vary the most lender-to-lender and the real challenge comes with getting the right broker with the right knowledge and experience.
A mortgage broker can claim they’re ‘whole-of-market’, but if they don’t know have a thorough knowledge of company director and self employed mortgage criteria, then there’s simply no point in them having access to it.
For the most part, eligible company owner borrowers are treated the same as any other borrower in terms of deposit requirements, up to 95% loan to value. Things sometimes change when you use the more specialist lenders because they try to mitigate the increased risk against larger deposits. Typically, with a 15% deposit you will have access to the majority of specialist lenders (there is one specialist lender who will consider a 95% loan to value ratio (LTV) in certain circumstances). If you have adverse credit the requirement may be more depending on what the issues are and how recent they are.
Since the roll out of mortgage market review (MMR) many lenders have moved away from typical income multiple models and have implemented more of an affordability based assessment. That said, they do cap lending on mortgages for company directors at certain limits and the income multiple rule still offers a good guide as to the maximum you will be able to borrow.
As director of a company, your accountant will most likely have recommended you take a salary up to the tax-free threshold, and then dividends for any other income. It is common for directors to want to leave cash in the business to a) avoid paying further income tax, or b) provide growth funds for the business.
The impact of this, however, is that most lenders consider ‘income’ as being the actual drawings from the business, so if your company has made a profit of £200k and you have only paid yourself £40k through salary and dividends lenders will consider your income to be £40k. This is where a lot of mortgage applications for self-employed directors fall down, because most of the high street lenders operate in this way and it takes specialist knowledge of the niche alternatives to find a suitable lender.
If you have recently changed trading styles (e.g. many sole traders go Ltd when they start earning larger sums) and you don’t have a full years trading under the new arrangement, then finding a mortgage can seem impossible. Almost all lenders will consider it a fresh business and as such require the standard one to three years’-worth of trading accounts from the new business to establish your income and affordability, even if you had been running the exact same business for 10 years under the previous trading style!
Thankfully not all lenders are the same and there are a select few who consider the previous business as evidence of income even though it will have ceased trading.
If however you are a director of a limited company who has declared a loss in the last three years resulting in adverse credit starting again can be very difficult if he/she is wanting to go with one of the high street lenders. This is because it can indicate to them a lack of income reliability and, thus, increased risk.
If you have declared a loss in the most recent year then it is highly unlikely a lender will approve you, unless your salary is deducted before profits, in which case it may still be approved subject to a satisfactory explanation and underwriter approval. If the loss was two years ago and you have made a recovery since, you are more likely, and if the loss was three years ago with a three year trend of recovery there are several specialist lenders who’ll consider you.
Directors of a growing business making more income in the most recent year than previous, may struggle to get approved because lenders will usually average the last two or three years income.
Thankfully there are specialists who will consider mortgages for ltd company directors based on the most recent years’ income, so make an enquiry and we will pass it onto a specialist!
If you have equity in your property and are looking to borrow money for your business (or to invest in another business or asset), it’s likely you’ve been declined as the majority of lenders only allow capital raising for consolidating debt, home improvements, or perhaps consumer goods such as a car or holiday – when it comes to business purposes there are only a handful of specialist lenders that will consider the application.
With these lenders you can usually get up to 85% loan to value as a maximum (subject to usual affordability etc), even if you have had adverse credit in the past.
Whatever your situation is, there is an advisor that has the right experience and the right expertise in this area to get you the best outcome possible. Hundreds of borrowers come to Online Mortgage Advisor having been let down elsewhere, and as the company director specialist advisors we train and work with experts in this field, we are confident customers will likely get the mortgage they need.