Mortgages for Company Directors
In the years preceding the credit crunch, self-employed people and directors were able to self-certify their income. This meant that mortgages for these people were often dubbed ‘liar loans’ because there was little in the ways of checks which validated a person’s income. Although it is not impossible to obtain a mortgage for company directors, it can be a bit more complicated.
Implications of company directors restricting their salary
The reasons for this are various; company directors usually take a lower salary and restrict their dividend payments, which can be useful for tax purposes, but not so good when it comes to a mortgage application. This is because lenders need to be able to access an applicant’s ability to pay back the loan- the mortgage – and this can only be accurately done based on an affordability assessment.
In the pre-crash years, mortgages were often calculated based on a salary and multiples of it, whereas now lenders like to see what other financial commitments people have, and therefore what they can realistically afford to pay on their mortgage. For first time buyers, who perhaps may have been renting, then there is also little in the way of substantial lending history for lenders to consider.
Mortgage lending which considers business profit
The problem for company directors is that the mortgage is often accessed on income, which ignores the profits that the business makes. It also often ignores dividend payments. Some lenders, however, are starting to access this, and are beginning to include profit along with income. This is a much more accurate reflection; if a business is doing well, then there is a higher chance that the company director might pay themselves a higher salary. Likewise, if the business is not doing so well, then there may be a cause for concern with the salary.
Aside from the logistics of calculating the amount, the same rules apply to company directors as with a self-employed person. Like self-employed people, directors will need to provide about three years of company records, to show the accounts of the business, and some lenders also want to see forecasts of future trading. A good credit history and healthy deposit are also important.
These rules aren’t particularly different for first time buyers, but it is important to make sure that you do everything that you help you get a mortgage, even if you were employed. Comprehensive records of the business, and a credit history of your own are essential. Being a first time buyer who is also a director does not exclude you from home ownership, but it just means that you need to be prepared to meet the criteria and also shop around for the best deal, or a broker who can match your needs to the best lender.