Directors mortgage (A complete guide)

In this brief guide, we are going to discuss getting a directors mortgage.

Company directors and business owners now have unique mortgage products referred to as directors mortgage, mortgages for business owners or company directors mortgage.

These mortgages are built to suit the needs of company directors who often present a more unique case than most other borrowers.

Company directors mortgages are not just available from specialist mortgage lenders, in fact, a lot of high street mortgage lenders are now providing these company director mortgages in order to meet the needs of a growing part of the mortgage market.

That being said, you will find a bigger pool of mortgage lenders who offer the company directors mortgages in the niche area of the mortgage market being offered by specialist mortgage lenders.

These specialist mortgage lenders seem to have the most flexibility when dealing with directors and business owners.

If you are looking for a company directors mortgage then a mortgage broker may be able to assist you in getting this mortgage.

How to get a directors mortgage

The mortgage lending criteria for a company directors mortgage will differ from one mortgage lender to another and this difference can be quite huge in some instances and affect your mortgage affordability.

The question of how your income as a business owner or company director is calculated tends to take the main stage and this factor alone can be the difference between you getting a mortgage offer or being rejected for a mortgage.

There is, however, a standard requirement that most mortgage lenders have:

• You should have been trading for at least 12 months and have your accounts ready

In some cases, you may even be asked to provide up to 3 years worth of accounts and tax returns for your business.

If your tax year does not run from April to April and the tax return you have does not cover a full year then there are some mortgage lenders who may be willing to simply look at a 12-month snapshot of your accounts to determine your affordability.

This could be a better compromise than requiring you to wait a few months before you apply.

Not all mortgage lenders will insist on at least 12 months of accounts.  

There are some professions where the mortgage lender will look at your potential future income, any log term contracts you have and determine if you meet their affordability requirements for a directors mortgage from this rather than looking at historic financial information.

IT professionals and doctors usually fall in this basket.

What deposit will you need to put down for a company directors mortgage?

Company director mortgages do not tend to have a higher risk profile than other borrowers and hence you can expect to get a directors mortgage with a mortgage deposit of just 5% based on your mortgage affordability.

This means a loan to value of up to 95%.

If you have bad credit or you have a complex income situation then you can naturally expect the mortgage deposit requirement to be much higher.

If the size of the mortgage you are after is quite high e.g a million pond mortgage then you can expect that the mortgage lender may have an increased mortgage deposit requirement than the standard 5%.

This is standard practice for all mortgage lenders as they look to limit their risks.

If your mortgage case is complex and required a specialist mortgage lender who has more relaxed lending criteria then you can also expect the mortgage deposit requirement to be a bit higher than usual. 

As usual, if you put down a larger mortgage deposit then you can expect to be offered much better mortgage rates as you reduce the mortgage lenders risk through a lower loan to value.

Government schemes for a company director mortgage

You may also be able to benefit from numerous government schemes which allow home movers and first-time buyers to increase their mortgage deposit if eligible for the scheme.

Depending on what your annual salary is you may be able to use a government scheme to help you get a directors mortgage.

The government schemes can help you put down a bigger mortgage deposit which will reduce your loan to value and potentially get you a better mortgage rate.

The government schemes include:

• Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
• Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
• Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
• Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
• Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
• Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
• Right to buy– allows you to buy your home at a discount price.
• Preserved right to buy– same as above.
• Right to acquire- same as above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Can you get a directors mortgage with bad credit?

Getting a directors mortgage with bad credit is very much possible. It all depends on the type of bad credit and how long ag it was incurred.

Most mortgage lenders usually want to lend to borrowers who have a good credit score and have shown a good repayment history on all their previous debts but there are mortgage lenders (usually not high street lenders) who tend to look at things on a case by case basis.

This means there are mortgage lenders who will offer a directors mortgage to a borrower depending on what type of bad credit was and what the circumstances were.

If it was a CCJ which was satisfied and is a certain age then some mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a maximum amount.

If it was a home repossession or bankruptcy then you will usually have to wait at least 12 months before you can consider trying to get a directors mortgage.

When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you in getting a directors mortgage.

Bad credit could include:

A CCJ

An IVA

Missed credit repayments

Late credit repayments

A debt management plan

No credit history

A default

A bankruptcy

A home repossession

If you have bad credit you may be required to put down a much larger mortgage deposit and you can expect to be offered a higher mortgage rate on your director’s mortgage.

How is your verified income determined for a directors mortgage?

Different mortgage lenders use different methods when working out what your verified income for a directors mortgage is.

This is where it gets tricky and directors could often find that getting a mortgage is much harder as a director than if they were a salaried employee.

The issue with determining “verified income” is that most company directors look to behave in the most tax-efficient way possible.

This s usually means that they do not draw any or little salary(or dividends) and hence a lot of the profit is retained within the company accounts.

So a cash-rich company but more often a cash-poor director.

The issue with this is that in the eyes of the most mortgage lenders the borrower may not meet or pas their mortgage affordability checks.

There are however specialist mortgage lenders who understand how company directors think and have built specialist director mortgage products to fit this segment of the market.

These directors mortgages take into account a variety of ways when determining the verified income of the director.  

This could include a portion of retained profits in the company which the director will have had a right to and their drawn income.

By using your share of the profits to determine your verified income then you could potentially be able to borrow much more.

Most high street mortgage lenders will unfortunately only consider the money you have drawn as income or dividends from the company and hence if you apply with these mortgage lenders you may limit your true borrowing capacity.

How much can you borrow as a company director?

The amount you may be able to borrow as a company director will depend on what the mortgage lender determines to be your “verified income”.

The method mortgage lenders use to work out your verified income will also affect how much you are able to borrow significantly.

The mortgage lender will then apply their income multiple on this figure to derive the maximum mortgage they could borrow you.

The income multiples used by mortgage lenders for directors mortgage could be anywhere from 3 to 5.

This figure will differ from one mortgage lender to another.

An example: If your share of profits at the company are £500,000 and you draw a salary(plus dividends) of £100,000 then the mortgage lender may choose to only apply the income multiple to the salary you draw.

Some mortgage lenders may apply the income multiple to a percentile of your share of the company profits whilst others will only apply the income multiple to the income you draw from the share of profits.

From the example above if the lender uses your drawn income you will be able to borrow a maximum of £300,000 with an income multiple of 3.

On the other hand, if the mortgage lender uses 100% of your share of company profits then you will be able to borrow £1,500,000.

As you can see, a very big difference. 

Your mortgage broker could assist you in finding a mortgage lender who suits your plans.

If you require a mortgage lender who could utilize the share of company profits when considering your mortgage affordability for a directors mortgage then you may need to look more at specialist mortgage lenders.

What documents will you need for a company director mortgage?

For a company directors mortgage, the most important documents you will need are those which prove your income.

The documents you will need for a directors mortgage include:

• Yous SA302 tax form
• Your company accounts
• 3 months worth of personal bank statements
• 3 months worth of  business account statements

When you provide your SA302 tax calculations you will also usually be required to provide all corresponding tax documents for the year.

Most mortgage lenders will require at least one years worth of SA302 calculations or accounts but they may require as much as 3 years worth of calculations.

Most mortgage lenders will usually require an accountants certificate for a mortgage to be completed by a qualified accountant.

Most mortgage lenders will then use an average income to work out what your true income is.

This means if the mortgage lender asks for more than one years worth of accounts they will use an average of all the accounts to determine what your income is.

Specialist mortgage lenders, on the other hand, will be able to use the most recent bank statements to determine your income.

Can you get a directors mortgage with last years accounts?

Yes, you can get a directors mortgage with last years account. There are some specialist mortgage lenders who will give you a directors mortgage with last years accounts. 

Unfortunately, not a lot of high street mortgage lenders will consider your must previous accounts only.

These mortgage lenders will want to be sure that any increase in profits for that last year is not a one-off blip in performance and those profit levels can be maintained for many more years.

Using the last year account could significantly improve your mortgage affordability in a case the most recent accounts which you filed have shown a significant increase in profits.

If the prior years were much more difficult due to much higher overheads or maybe it was your start u years and hence things were just picking up speed then you could find mortgage lenders who will consider this and significantly increase the maximum you can borrow.

An example of this:

Year 1 profits	£3,900
Year 2 profits	£25,900
Year 3 profits	£74,000
3-year average	£34,600

A high street mortgage lender which uses an average to assess your income could simply use the average an apply their income multiple to this.

A specialist mortgage lender may be able to use only year 3 profit figures to work out how much you could borrow.

If we use 5 as a multiple then you could borrow a maximum of £173,000  with a high street lender as they will multiply 5 by the average of £34,600.

If you used a specialist lender who used year 3 accounts then you could borrow a maximum of 370,000 as they will multiply 5 by your last years account profits of £74,000.

This makes a significant difference.

Flexible directors mortgage

There are also flexible director mortgages which could allow you to overpay your mortgage using your annual bonus. 

This could be very beneficial to you as it means you could reduce your mortgage balance and hence subsequent mortgage interest.

Directors mortgages for companies with retained profits

If you have retained profits in your company then there are some specialist mortgage lenders who will consider this and use your retained profits when applying their income multiple. Unfortunately, not a lot of high street mortgage lenders will consider retained profits when assessing business owners for mortgages.

There are many reasons why a company may want to retain profits, in most cases, it could be for tax reasons.

Example:

If you have had company profits of £200k then mortgage lenders with an income multiple of 5 may consider you for a maximum mortgage of £1,000,000.

This is much better than if the mortgage lender was to only consider your net profits of £40k which when an income multiple of 5 is applied your maximum borrowing on a mortgage for company directors will be £200k.

This is quite a big difference and could greatly affect your mortgage affordability.

If you want to use your retained profits when assessing your mortgage affordability so you could borrow more then there are mortgage lenders out there for you but you may need the help of a specialist mortgage broker.

Mortgage lenders who offer directors mortgages

There are a variety of mortgage lenders who offer directors mortgages. If you are looking for a directors mortgage then you may want to consider speaking to a mortgage broker who can advise you on what your mortgage options are and which mortgage lenders may be suitable to you.

The lending criteria for directors mortgages can differ substantially and hence a mortgage broker may be able to help you filter through and decide on what mortgage lenders may be suitable.

If you have a very short trading history or are worried you may not qualify for a directors mortgage then a mortgage broker could assist you. 

Mortgage rates for company director mortgages

The mortgage rates for company director mortgages differ from one mortgage lender to another.

A mortgage lender will offer you a mortgage rate based on your mortgage deposit, your verified income and your companies accounts.

Can you get a company directors mortgage if your company made a loss

Yes, you may be able to get a directors mortgage even if your company has made a loss.

The mortgage lender will usually require 3 years worth of accounts and hence would be able to take the average profit over those years to use when determining your verified income.

In reality, it may be very hard to find a high street mortgage lender who will offer a directors mortgage if your business has had losses recently (as this could signify that the mortgage may default ) but there are a lot of specialist mortgage lenders who will be able to consider your mortgage application especially if your business has recovered since.

If the losses were due to you drawing a salary from the company then it all depends on how you prepare your mortgage application and supporting documents.

A specialist mortgage broker may be able to help you.

Remortgaging to invest in a business

Getting a remortgage to release equity which you will then use to invest in your business may be much harder to do.

There are very few mortgage lenders who will consider this and hence any remortgage options you find may have much higher mortgage rates than your current mortgage.

What is the SA302?

The SA302 is a tax calculation for those who are self-employed. You submit an SA392 self-assessment return at the end of the year and can get your SA302 calculation from HMRC.

Your SA302 shows where your income comes from and then breaks down your national insurance and income tax contributions.

How to get your SA302 

If your SA302 is submitted by an accountant then you may be able to print off your SA302 tax calculation from the software used by your accountants.

If you handle the submission of your SA302 tax calculation form yourself then you may be able to log into your HMRC portal and print off your SA302 tax calculation form.

You may be able to print up to four years worth off SA302 calculations. If you submit your SA302 tax form by post then you may have to request your SA302 tax calculations via post from HMRC.

The director’s mortgage lender may accept a printed off SA302 tax calculation but they may also as you to provide a signed SA302 calculation. In this case, you may need to get an accountant to sign off the document.

To request your SA302 you can call the Self Assessment helpline on 0300 200 3310.

You will need your National Insurance number and Unique Taxpayer Reference (UTR). 

You can also write to: Self Assessment, HM Revenue and Customs, BX9 1AS. 

It may take as much as 2 weeks for the document to arrive at your address.

FAQs: directors mortgage

Below are some of the most frequently asked questions related to getting a directors mortgage.

What if you have changed your company type?

If you have changed your company type and you are after a directors mortgage then the mortgage lender will want to know how long ago the change took place.

If the change took place more than 3 years ago then there won’t be an issue but if the change took place less than 3 years ago then the mortgage lender may require more proof of your verified income in order to determine your mortgage affordability.

A change of company type is when you change the legal status of your company.  

This could be changing from a sole trader to a limited company or similar.

Mortgage lenders usually treat a company change as it being a new company and this means they will not consider your old mortgage accounts.

The specialist mortgage lenders who offer mortgages for directors or mortgages for business owners then it is more likely that the mortgage lender will consider your old accounts.

Self-employed mortgage calculator

You can use a self-employed mortgage calculator to see what your monthly mortgage repayments could be on a directors mortgage.

You should remember a self-employed mortgage calculator should only be used as a guide and does not reflect your true mortgage affordability.

Use a company director mortgage broker

You may want to consider using an independent mortgage broker to get a mortgage.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month, if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.

In this brief guide, we are going to discuss getting a directors mortgage.

If you have any comments or questions please let us know.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.