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Getting a Mortgage as a Company Director
Many company directors structure their income by taking a combination of salary and dividends, as this is often a more tax-efficient way to be paid. However, when applying for a mortgage, some lenders view dividend income differently, and their criteria for assessing it can vary significantly. While some lenders are more accommodating to company directors, others may be more restrictive in how they calculate income.
The good news is that many lenders do accept dividend income when assessing mortgage affordability. This guide explains how mortgage lenders assess dividend income, the documents required, and how to improve your chances of securing a mortgage as a company director.
Strive Mortgages are experts in helping self-employed individuals and company directors navigate the mortgage application process and secure the best deal possible.
What Is Dividend Income?
Dividend income is the portion of a company’s profits that is distributed to shareholders. For company directors, this is often a major part of their overall earnings and is taken in addition to a base salary. Unlike salaried employees who receive a fixed income, company directors have more flexibility in how they withdraw funds from their business, which can impact how mortgage lenders view their earnings.
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How Is Dividend Income Calculated?
The amount of dividend income a company director takes is usually determined in consultation with their accountant. Many directors aim to keep their total income within certain tax thresholds to optimise tax efficiency. For example, staying below the £50,000 threshold helps avoid higher-rate tax liability.
Some directors may choose to retain profits in the business rather than withdrawing large dividends. While this strategy can be beneficial for business growth, it may affect how much mortgage lenders will consider as personal income.
What Documents Are Required?
To support a mortgage application using dividend income, most lenders will request the following documents:
- SA302 tax calculations (covering the last two years) – This document shows your declared income, including salary and dividends.
- Company accounts (for the last two years) and/or an accountant’s certificate – These documents provide an overview of the company’s financial health.
- Business bank statements (usually covering the last three to six months) – Lenders use these to verify cash flow and ensure that declared income aligns with business performance.
Having well-organised and up-to-date financial documents will increase the likelihood of mortgage approval.
How Do Lenders Calculate Your Income?
Most lenders assess income based on an average of the last two years, provided the figures are stable or increasing. If the income is declining, lenders will typically use the latest year’s figure. Here’s how this works in practice:
- If income is increasing:
- Year 1: £40,000
- Year 2: £50,000
- Mortgage calculation: £45,000 (average of two years)
- If income is decreasing:
- Year 1: £50,000
- Year 2: £40,000
- Mortgage calculation: £40,000 (latest year’s income is used)
Some lenders may use only the most recent year’s income instead of an average. This can be advantageous if your income has risen significantly in the latest tax year.
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Cross-Referencing Profit and Dividends
Lenders will cross-reference declared dividends with company profits to ensure that there is sufficient profit to sustain the withdrawals. For example:
- Declared dividends: £50,000
- Company profit: £30,000
In this case, most lenders would base affordability on the lower figure (£30,000), as withdrawing more than the company’s available profit may not be sustainable.
Can Business Profits Be Used Instead of Dividends?
In some cases, dividends may not accurately reflect a company director’s total earning potential, particularly if they choose to retain significant profits in the business. Some lenders will consider an alternative approach, using salary plus net business profit instead of just salary and dividends. For example:
- Declared dividends: £50,000
- Retained profit: £100,000
- Total assessed income: £150,000
Using this method, a lender applying a 4.5x income multiple could offer a significantly higher mortgage amount.
Can You Get a Mortgage with Just One Year of Accounts?
While most lenders prefer to see at least two years of accounts, some are willing to consider applications with just one year. This is particularly likely if the applicant has prior experience in the same field and can provide strong business projections for the coming year.
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How to Improve Your Chances of Mortgage Approval with Dividend Income
To maximise your chances of securing a mortgage, consider the following steps:
- Maintain a Longer Trading History – The longer your business has been operating successfully, the more appealing you will be to lenders. Aim for at least two years of accounts where possible.
- Keep Business Bank Statements Healthy – Ensure that your business bank account maintains a steady cash flow, and avoid large, unexplained cash withdrawals before applying for a mortgage.
- Maintain a Strong Credit Score – A clean personal and business credit history can improve your mortgage options and lead to better interest rates.
- Understand Profit vs Turnover – Lenders focus on net profit rather than turnover when assessing affordability. Managing expenses wisely can help reflect stronger profits.
- Save for a Larger Deposit – The higher your deposit, the lower the perceived risk for the lender, which can result in better mortgage terms and higher borrowing limits.
- Work with a Mortgage Broker – A specialist mortgage broker, such as Strive Mortgages, can help you navigate complex lending criteria and find the most suitable lender for your situation.
Why Choose Strive Mortgages?
Strive Mortgages specialises in helping self-employed individuals and company directors secure mortgages. We understand the complexities of using dividend income for mortgage applications and have access to lenders that are more accommodating to company directors.
By working with Strive Mortgages, you can benefit from expert guidance, tailored advice, and access to mortgage products that align with your financial circumstances. Contact us today to discuss your mortgage options.
FAQs
Yes, but it must be sustainable and supported by company profits. Lenders typically assess an average over one or two years to ensure consistency and affordability.
Lenders generally offer between 4.5 to 5.5 times your income. A larger deposit and higher income can increase borrowing potential.
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