New mortgage options are making it easier for company directors to buy property
When you need to buy a new property, a common way of doing it is getting a mortgage on the property you have set your sights on. The issues that come up with this approach is that mortgage options have been limited for a while because traditional mortgage models did not cater to everyone. For example, it has always been difficult for self-employed people or company directors to get a mortgage. That is no longer the case because mortgage lenders have started catering to people who do not fall into any traditional employment category. This has opened up new opportunities for this new wave of people who cannot take on mortgages on properties they want.
Source of frustration
A common source of frustration for people looking for a mortgage is that they often do not get a mortgage amount that is a true reflection of their financial potential. This applies to company directors where mortgage lenders use different criteria to calculate the amount they can lend.
To understand why this is, we need to understand how company directors pay themselves. Most company directors draw very little money from their companies, usually just enough to keep up with their tax obligations. They then take on dividends from the business and leave the rest of the money in the company, to either reinvest or keep good cash flow.
The problem arises when mortgage lenders use the declared income, which is usually lower than the financial ability of the company director, to calculate the amount they can lend them. This limits the amount of money a company director can borrow, even though they can comfortably pay off a higher amount by drawing more money from their business.
Focusing on net profits
Fortunately, company directors can find lenders who use the net profit to calculate the mortgage they can give them. Instead of looking at the director’s declared income, they will look at the net profit of the company. By doing so, they base their decisions on the amount of money the business makes rather than the director’s declared income. This makes a lot of difference.
For example, if a director pays themselves £30,000 and the company makes £100,000 in net profits, the lender might look at the £70,000 difference and use that in their calculations. This can be the difference between getting a £150,000 and a £500,000 mortgage offer if the lender uses a 5X multiplier.
One advantage of doing this way is allowing company directors to buy much more expensive property without drawing extra money from their business, putting up a larger deposit or paying a higher tax amount. Company directors can successfully apply for a mortgage by proving the net profit exists in their books – and that is often enough.
Getting the mortgage
Since the way company directors declare income is different from someone who is employed, there are certain things lenders need to see before they can give them the mortgage. These include tax returns and calculations, accountant certificates and certified company accounts.
Remember that different lenders will treat you differently depending on how much of the company you own. To be classed as self-employed, you need to own at least 25% of the company with any percentage below 30% leading you to be declared employed, depending on how specific lenders define employment. If you want to learn more about a self-employed mortgage for company directors, you can read this guide from mortgageexpertsonline.co.uk. Mortgage Experts Online has expert mortgage advisors standing by to help you choose the right type of mortgage, regardless of whether you are employed or self-employed. By doing this, they take away the headache of shopping with different lenders and comparing them, a process that can be incredibly difficult and confusing, especially for first-time borrowers.
A mortgage with bad credit
Company directors with bad credit can still get a mortgage. Just remember that the process and challenges will be the same as if you were employed or were looking for another type of mortgage. Talk to a financial advisor or mortgage expert so they can help you chart the way forward.
A tip for borrowers
When you find a lender willing to consider net profits in their mortgage calculations, it can be tempting to take out a bigger mortgage than you initially planned to. This is the wrong approach because a bigger mortgage means you will have higher monthly payments or will need to repay the mortgage for longer. Both of these are not viable because you will be losing money when you think about it carefully. So, always borrow what you initially wanted and pay a bigger deposit if you have the extra money to do so.
Getting a loan as a company director is slightly different from getting it as a self-employed applicant, depending on how the lender chooses to calculate your amount. If you need a bigger amount, encourage them to calculate the amount using net profits rather than your declared income.
