Can you get a mortgage based on dividend income?
Limited company directors often pay themselves a combination of salary and dividends to take advantage of tax benefits. While this is good news for your tax bill, you may wonder if dividends qualify as income for mortgage purposes. Although it’s true that not all mortgage lenders consider dividends a stable income, the good news is that most do.
As a company director, many lenders will offer you a mortgage based on your total income, including dividends, investments, and rental income, meaning you could borrow more. This varies by lender, and you may need to approach specialist lenders through a mortgage broker.
Read on for our helpful guide on how your dividend income could affect your next mortgage application.
At Goldmanread, we help many company directors find competitive mortgages. If you need advice, we’d be happy to discuss your needs. Please contact us, and we’ll get in touch as soon as possible.
Why should limited company directors use an experienced mortgage broker?
Company directors don’t always fit the regular, traditional income model favoured by mainstream mortgage lenders, which can put them at a disadvantage. Some lenders base their calculations on salary alone, ignoring dividend income.
As a result, directors may be offered lower income multiples than they would like, limiting the amount they can borrow despite their higher overall earnings. That’s why it’s a good move to speak to a specialised mortgage advisor before applying for a company director mortgage.
Using our industry insight and contacts, we can steer you towards the right specialist lenders for your needs and find you a competitive deal. This not only saves you valuable time but also grants you access to exclusive offers not available directly to borrowers.
If you are a professional looking for a mortgage in Essex, then contact Goldmanread to discuss your requirements and find out how we can help.
What is dividend income?
Dividends are a payout from a company’s net profit to its shareholders or directors.
Limited company directors usually pay themselves a combination of salary and dividend income. Many take a salary up to the basic rate threshold to minimise income tax. Dividend income is not subject to national insurance, further enhancing the tax benefits.
Dividends can also be paid out as part of a standard investment portfolio. For example, a share in one of the major high street banks, such as Lloyds or Barclays, will usually attract dividend payments. Some lenders may take this into account when assessing the multiples for a mortgage, but for the purpose of this article, we will focus on dividends paid out from a limited company to a director.
How is a dividend calculated?
Dividend payments are made from the company’s profits after tax. The company must ensure it has enough post-tax profit before paying dividends (although there are circumstances in which loss-making companies can pay a dividend, i.e., from retained profits from previous years).
Directors can choose when and how to declare dividends, usually with the advice of an accountant or tax specialist. The process involves declaring the dividend formally in board minutes and issuing dividend vouchers to shareholders.
Dividends are subject to dividend tax, with thresholds based on the current UK tax bands, but they are not subject to national insurance contributions, making them tax-efficient compared to salary.
Can I get a mortgage with dividend income from my limited company?
These days, most lenders consider dividends as part of total income when assessing directors for a mortgage. However, the criteria differ from lender to lender. For some mortgage providers, dividends count equally to salary in their mortgage affordability calculations.
The key is approaching the right lenders for your particular situation, which may not be traditional high-street lenders.
What documentation do I need to provide to support my dividend income?
Depending on the mortgage lender, you will need to supply documentation including:
- Your last three years:
- SA302s
- Tax Year Overviews – to confirm that all taxation liabilities have been met. You can find instructions on how to download them here.
- Limited company accounts – usually put together by a professional accountant.
- Business and personal bank statements – to verify monthly income.
How long should I have been receiving dividends before applying for a mortgage?
Most mortgage lenders want to see two to three years of dividend income to consider it part of a borrower’s overall income for a mortgage application.
While there are a few lenders who may consider only one year’s worth of dividend income, they are few and far between, and you would need to supply your first-year limited company accounts or an accountant’s certificate by way of confirmation.
To access the widest range of lenders and more favourable mortgage terms, having two to three years of dividend income is beneficial. This gives lenders greater confidence in the stability of your income and increases your chances of being approved.
What other income will mortgage lenders consider?
Most mortgage lenders tend to consider the following income sources:
- PAYE salary
- Dividend payments
- Net profit after corporation tax
- Gross profit – If the company retains profits in the business, lenders might consider its gross profit before tax in some cases.
In addition to salary and dividends, some mortgage lenders consider other income sources, such as:
- Rental income
- Bonuses and commissions
- Investment income
- Child maintenance payments
Is it hard to get a mortgage with a dividend income?
For most borrowers, getting a mortgage based on a combined income, including dividends, is straightforward. However, success depends on knowing which lenders will consider your individual circumstances most favourably.
Lenders all have unique criteria, but they typically include:
- Trading history – typically, two to three years of business accounts showing stable salary and dividends.
- Consistent income – again, lenders prefer consistent dividends and salary over two or three years.
- Deposit – a deposit of 10-15% is standard, though a higher deposit may be required for dividend-based income.
- Credit score – a good credit history improves your chances of mortgage approval.
Lenders assess income and affordability on a case-by-case basis, so it’s a good idea to work with a broker to ensure you only approach lenders who will consider your individual circumstances.
How to maximise your mortgage affordability as a company director
It’s important to have a good understanding of how mortgage providers assess self-employed applicants to help maximise your borrowing power.
Here are some tips to improve your mortgage affordability:
- Keep clear financial records – make sure your accounts and tax returns are up-to-date and preferably prepared by an accountant.
- Show consistent income – draw a steady salary and dividends over two to three years.
- Improve your credit score – maintain a strong credit rating by avoiding late payments.
- Minimise personal and business debt
- Increase your deposit – certain lenders will only lend to self-employed applicants with larger deposits, typically 15-20%.
- Choose the right lender – mortgage brokers can help you identify lenders who will consider dividend income and retained profits.
- Prepare a strong application – a broker can help you compile the necessary documentation and manage your application.
- Consider a joint mortgage – boost your borrowing power by combining your income with a partner’s income.
Can I get a company director mortgage if I have bad credit?
It is possible to get a company director mortgage if you have adverse credit, but it’s more challenging. Specialist lenders are often more flexible with company directors with poor credit, as they may consider the broader picture, such as the business’s financial health and overall income.
If you have bad credit, you may face higher interest rates, need a larger deposit, or provide more detailed financial documentation. Working with a mortgage broker who understands bad credit mortgages can increase your chances of finding the right lender and being approved for a suitable deal.
Why choose Goldmanread?
At Goldmanread, we specialise in helping limited company directors secure the right mortgage. With our extensive experience and access to hundreds of lenders across the mortgage market, we can choose from thousands of mortgage products to meet your unique needs.
We will guide you through the process, searching the entire market to find the most competitive rates and the best monthly mortgage repayments for your situation.
Take the first step towards your ideal mortgage – contact us today and let us help you get started.
In summary
Getting a mortgage using dividend income is possible, especially for company directors who combine salary and dividends. While not all lenders consider dividends as stable income, many do, making it essential to approach the right ones.
Working with an experienced mortgage broker is wise. They have access to both high-street and specialist lenders and can steer you towards the right one for your circumstances.
By preparing strong financial documentation, showing consistent income, and choosing the right lender, company directors can improve their chances of mortgage approval and secure the best deal for their situation.
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