Running your business through a limited company can provide valuable commercial and tax- planning opportunities. However, it can also make your income more complicated from a mortgage lender’s perspective.
Instead of receiving one straightforward PAYE salary, you may take income through a combination of salary and dividends while retaining some of the company’s profit within the business. If the company has only recently started trading, or you have recently moved from another trading structure, some lenders may struggle to assess your true financial position.
That does not necessarily mean you need to wait several years before applying for a mortgage. Some lenders may consider limited company business owners with a shorter trading history, particularly where an underwriter can review the application individually.
The key is to approach a lender whose income calculation and underwriting criteria are suitable for your circumstances.
At a glance
- Limited company business owners are often treated as self-employed for mortgage purposes.
- Lenders may assess income using salary and dividends or, in some cases, salary and a share of company profits.
- Your percentage shareholding can affect how a lender assesses you.
- Some lenders may consider applicants with one year of company accounts, subject to their criteria.
- Manual underwriting allows the circumstances behind your figures to be considered.
- Well-prepared accounts, tax documents and bank statements can help prevent avoidable delays.
Why lenders assess limited company business owners differently
A PAYE employee can usually evidence their income using payslips, a P60 and personal bank statements. The position can be more complicated when you own a limited company.
Your personal income may include:
- a director’s salary;
- dividends;
- a share of the company’s profits; or
- a combination of these.
You may also leave profit within the company to support cash flow, cover future costs or fund business growth.
Some lenders will consider only the salary and dividends you have withdrawn. Others may be prepared to assess your salary together with your share of the company’s profit.
These different approaches can produce significantly different affordability results.
For example, if you take a modest salary and leave a substantial amount of profit within the company, a salary-and-dividends assessment may not reflect the overall strength of the business. A lender willing to consider company profit may reach a different conclusion, subject to its assessment of sustainability and affordability.
Does your shareholding matter?
Yes. Your percentage ownership of the company can affect whether a lender treats you as employed or self-employed.
The relevant shareholding threshold varies between lenders. Some may treat you as self-employed if you own a relatively small percentage, while others apply a higher threshold.
Where you are treated as self-employed, the lender may ask for company accounts and tax documents in addition to your payslips and bank statements.
Your shareholding can also affect how much company profit a lender is prepared to attribute to you. If you own 50% of the company, for example, a lender considering company profit would not normally treat all the profit as your personal income.
What is manual underwriting?
Manual underwriting means that an experienced underwriter reviews the details of your application rather than the decision being based entirely on an automated system.
Depending on the lender and your circumstances, the underwriter may consider:
- your finalised company accounts;
- your salary and dividends;
- your percentage shareholding;
- your share of company profits;
- recent business performance;
- retained profits and cash reserves;
- company liabilities and ongoing costs;
- personal and business bank statements;
- information supplied by your accountant;
- your credit history and personal commitments; and
- the background to any recent change in trading structure.
This can be helpful where the figures need further explanation.
For example, your company may have invested heavily during its first year, recently secured new contracts or continued the same underlying business after a move from sole trader to limited company status.
Manual underwriting does not mean that the lender’s usual requirements are relaxed. You will still need to meet its affordability, credit, deposit and property criteria. It simply allows the application to be assessed in greater context.
How lenders calculate income from a limited company
There is no single calculation used by every mortgage lender. Depending on its criteria, a lender may use one of the following approaches.
1. Salary and dividends
This is a common method of assessing limited company business owners.
The lender adds together the director’s salary and dividends received during the relevant accounting period. These figures will normally need to be supported by company accounts, payslips, dividend vouchers and tax documents.
This approach may work well if you regularly withdraw most of the income available to you. It can be less representative if you retain a significant amount of profit within the company.
2. Salary and share of profit after corporation tax
Some lenders may add your salary to your share of the company’s profit after corporation tax.
This can be helpful where the business generates more profit than you withdraw through dividends. The lender will usually consider your percentage ownership and may also examine whether the profit is sustainable.
3. Salary and share of profit before corporation tax
A smaller number of lenders may assess salary together with your share of profit before corporation tax.
The treatment of tax, salary and other costs varies, so it is important to understand exactly how a lender performs its calculation before submitting an application.
4. An average of recent years
Where two or more years of figures are available, a lender may average the income. If income has fallen in the latest year, the lender may use the lower figure instead of an average.
It may also ask for an explanation of the reduction and evidence of current trading.
5. The latest year’s figures
Some lenders may consider using the most recent year rather than an average, particularly where the business has grown.
This will depend on the lender’s criteria and the evidence available to support the latest performance. A higher recent figure will not automatically be accepted if the lender believes it may be unsustainable.
Can you get a mortgage with one year of company accounts?
Potentially, yes.
Although many lenders prefer at least two years of accounts, some may consider an application from a limited company business owner with one full year of trading.
The lender may look at:
- your experience in the same profession or industry;
- the company’s profitability;
- the stability of recent income;
- your personal and business credit history;
- the size of your deposit;
- current contracts or evidence of ongoing work;
- company bank statements;
- the strength of the company’s balance sheet;
- any existing business liabilities; and
- an accountant’s assessment of current performance.
A shorter trading history normally means that fewer lenders will be available.
Mortgage approval is never guaranteed, and the amount you can borrow will depend on the application as a whole.
Moving from sole trader to limited company status
Changing from sole trader to limited company status can create additional questions during a mortgage application.
Some lenders may view the limited company as a new business because it is a separate legal entity. Others may consider the continuity of your trading history where you remain in the same profession or industry and there has been no meaningful break in the business.
Evidence of continuity could include:
- previous sole trader accounts and tax calculations;
- your limited company accounts;
- business bank statements;
- ongoing contracts;
- confirmation from your accountant; and
- evidence that you continue to provide the same services to the same or similar clients.
It is helpful to explain the change clearly rather than allowing the lender to assume that the business started on the company’s incorporation date.
Automated and manual underwriting compared
Automated assessment
An automated assessment can work well when an applicant’s circumstances fit a lender’s standard criteria. It may provide a quick initial decision using information such as declared income, financial commitments, deposit and credit-reference data.
However, it may be less suitable where:
- the limited company has a short trading history;
- income comes from salary, dividends and retained profit;
- the business has recently grown;
- the company has experienced a one-off reduction in profit; or
- the figures require an explanation.
Manual assessment
Manual underwriting gives an underwriter the opportunity to review the supporting evidence and understand the circumstances behind the figures.
This may be useful for limited company business owners with:
- only one year of accounts;
- rapidly increasing or fluctuating profits;
- retained company profit;
- a recent change in trading structure;
- income from more than one company;
- a minority shareholding; or
- circumstances that do not fit an automated lender’s standard model.
Neither approach guarantees acceptance. The important point is to choose a lender whose criteria and assessment process are appropriate for your circumstances.
Documents you may need
Document requirements vary between lenders, but you could be asked to provide:
- your latest finalised company accounts;
- SA302 tax calculations or tax computations;
- corresponding HMRC Tax Year Overviews;
- recent personal bank statements;
- recent company bank statements;
- payslips and a P60 for your director’s salary;
- dividend vouchers;
- confirmation of your shareholding;
- an accountant’s certificate or reference;
- details of company liabilities and financial commitments;
- management accounts or current trading figures; and
- evidence of previous trading if you have recently incorporated.
HMRC explains how to obtain an SA302 tax calculation and Tax Year Overview.
The exact requirements will depend on the lender. Providing complete and consistent information from the outset can help the application progress more efficiently.
Any differences between your accounts, tax documents, bank statements and application should be identified and explained before submission.
Common mistakes to avoid
Applying to a lender that does not suit your income structure
A lender may offer a competitive interest rate but use an income calculation that significantly restricts your borrowing.
The suitability of a lender should therefore be assessed using both its mortgage products and the way it treats income from a limited company.
Assuming every lender will use company profit
Some lenders assess only the salary and dividends you have received. Others may consider salary and your share of company profit.
A profitable company does not automatically mean that every lender will use that
profit when calculating affordability.
Assuming retained profit is personal income
Retained profit belongs to the company rather than to you personally. A lender willing to consider it will still assess your shareholding, company liabilities, cash flow and whether the money is needed to support the business.
Taking an unusually large dividend before applying
Withdrawing a large dividend solely to increase the income shown on an application may create questions about sustainability and the effect on the company’s finances.
Your income arrangements should be commercially appropriate and discussed with your accountant.
Making significant structural changes before an application
Changing your shareholding, accounting year-end, salary or dividend strategy shortly before applying can make the figures more difficult to interpret.
If you are planning to buy a property, it can be helpful to discuss the timing of significant changes with your accountant and mortgage adviser.
Allowing documents to show inconsistent figures
Your declared income should be consistent with your accounts, tax calculations, dividend vouchers and bank statements. Genuine differences should be explained before the application reaches the underwriter.
Making repeated applications after a decline
A rejection from one lender does not necessarily mean that every lender will reach the same decision. However, submitting several applications without understanding the reason for the original decline may result in unnecessary credit searches.
How Sarah Grace Mortgages can help
At Sarah Grace Mortgages, we have more than 30 years’ experience helping clients whose income requires a more considered approach. This includes limited company business owners, dentists and professionals with complex or changing income.
We can:
- review your company structure and trading history;
- establish how different lenders may assess your income;
- identify lenders whose criteria suit your circumstances;
- compare salary-and-dividend and company-profit calculations;
- liaise with your accountant where clarification is needed;
- help you prepare the supporting documents;
- present your circumstances clearly to the lender; and
- keep you, your estate agent and your solicitor updated throughout the process.
Our aim is to recommend a suitable mortgage from the options available to you and make the application process as straightforward as possible.
Find out more about mortgages for limited company business owners or mortgages for dentists trading through limited companies.
Alternatively, call us on 0203 6333 888 to discuss your circumstances.
Frequently asked questions
Do I need two full years of accounts?
Not always. Some lenders may consider a limited company business owner with one year of accounts, depending on their experience, company performance, deposit, credit history and wider circumstances.
Having a shorter trading history will usually reduce the number of lenders available.
Will a lender use my company’s total profit?
Not necessarily. Some lenders use salary and dividends, while others may consider your salary and share of company profit.
Your percentage ownership, company liabilities, cash flow and the sustainability of the profit may all be considered.
Does money retained in the company count as income?
Some lenders may consider your share of retained profit when assessing affordability, but others will not.
Retained profit is not automatically treated as personal income. The lender may consider whether the funds need to remain in the business to cover tax, working capital or other commitments.
Does manual underwriting take longer?
It can take longer than a straightforward automated application because an underwriter needs to review the supporting documents.
Providing complete, accurate and well-organised information can help reduce delays.
Are manually underwritten mortgages more expensive?
Not necessarily. Manual underwriting describes how an application is assessed rather than a particular mortgage product or interest rate.
The products available will depend on the lender, your circumstances and market
conditions at the time.
I recently changed from sole trader to limited company status. Has my trading history restarted?
Not in every lender’s view. Some may consider the continuity of your profession, business activity and income across both structures. Others may treat the limited company as a new business.
Clear supporting evidence will be important.
Can I get an Agreement in Principle?
Potentially, although an automated Agreement in Principle may not fully assess salary, dividends and company profit.
It is important to ensure that the income entered reflects the lender’s criteria and can be supported by your accounts and other documents.
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Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
Mortgage approval is subject to lender criteria, affordability checks, credit status and individual circumstances. This article is for general information only and does not constitute personal financial advice.
Sarah Grace Mortgages Limited is authorised and regulated by the Financial Conduct Authority and is registered in England and Wales. Registered Number 09839864.
