As the owner of a limited company your income may comprise both a salary and dividends. The question is, do mortgage providers recognise this hybrid income when they assess a mortgage application?
Most specialist UK mortgage lenders will offer limited company directors a mortgage based on their combined income, including dividends. They use the total income to calculate mortgage multiples, meaning that directors can benefit from higher borrowing levels. This varies between lenders. and is dependent on each provider’s lending criteria.
Using dividends to secure a mortgage in this way is a subject we’re asked about by many company directors. So here is Goldmanread’s concise guide, which we hope you will find helpful.
If you require further advice, we’d be happy to talk. Please contact us via the website and we’ll be in touch as soon as possible.
Why should limited company directors use a mortgage broker?
When making a mortgage application as a company director it is wise to consider using a specialist mortgage adviser like Goldmanread. We can guide you through the maze of specialist lenders to find the most competitive deal.
Not all lenders see dividends as stable income, as they do not fit the regular traditional income model.
Using our industry insight, a mortgage adviser can guide you in the right direction and avoid those lenders that are likely to decline your application, saving you precious time.
If you are a professional seeking a mortgage in Essex, contact Goldmanread to discuss your director mortgage requirements and find out how we can assist you.
What is dividend income?
In simple terms, dividend income refers to a payout from a company’s net profit to its shareholders or directors (although there are circumstances in which loss making companies can pay a dividend, i.e. from retained profits from previous years).
These type of payment structures are used mainly to reap tax benefits.
Those limited company directors that opt for this structure will normally pay themselves a combination of salary (up to the basic rate threshold to minimise income tax), plus dividend income.
Many process this in the form of monthly payments. 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 the income paid out from a limited company to the director.
How is a dividend calculated?
Dividend payments are usually calculated by company accountants when compiling their report for Companies House.
They will look at the current income paid out from the business over the year. They will calculate what level of this was PAYE salary (paid out as a monthly wage, usually up to the annual tax free allowance) and what part can be classed as dividend payments.
They will then declare this income in the most tax efficient manner so as to minimise the overall tax calculation, thus benefiting the director.
I’m a limited company director, can I get a mortgage with my dividend income?
Yes, as a limited company director, dividends count towards your total income when being assessed for a mortgage.
This is standard practice for a lot of mortgage providers and, often, dividends count equally to salary when calculating lending levels.
What level of dividend income is required by mortgage lenders?
Naturally, any mortgage lender requires evidence of regular income. A specialist lender is no different and will want to see regular payments of dividends.
Most lenders consider a minimum of 3 years of dividend payments as a reliable indicator.
Some may work on 2 years or the most recent 12 months figures (as long as the business has been in existence for at least 2-3 years).
What records do I need to provide?
Depending on the mortgage lender, the documentation you will need to provide will be any of the following:
- Last 3 years SA302’s (now called online tax calculations).
- Last 3 years corresponding Tax Year Overviews confirming that the tax has been paid and all taxation liabilities have been met.
- Last 3 years limited company accounts. These will usually be put together by the firms accountants.
In addition to these documents, mortgage providers will ask for copies of personal bank statements and business bank statement, which confirm monthly income.
They may also ask to see copies of monthly payslips, though this is unusual as, effectively, a company director can decide their own level of annual remuneration.
Finally, lenders may take into account other income when assessing a mortgage i.e. income from investments or rental income.
Below is a link to HMRC’s website which will instruct you how to download your online tax calculations and Tax Year Overviews.
Is it hard to get a mortgage with a dividend income?
No, but the success of your mortgage application will depend on your knowledge of which lenders will look most favourably on a dividend payment when assessing affordability.
It’s also valuable to understand which lender is appropriate to the length of time you have been in business and your current level of dividend income.
If you are looking to maximise your lending amount there may be other factors to consider apart from dividend income.
There are some lenders who will look at other aspects of the company balance sheet, which may be more beneficial when it comes to loan levels.
Can I get a director mortgage if I have bad credit?
Lenders will also take account of any bad credit experienced by both the director and the company itself.
Adverse credit experienced with any existing borrowing or any previous loans is an important factor in the success of a mortgage application.
In addition, the lenders will look at other debts in the background as well as deposits. Certain lenders will only lend to self-employed applicants if they have larger deposits.
It is possible for company directors to get a mortgage using dividend income but it’s important to apply to the right lender.
There are many lenders and products available, all of whom have slightly different criteria when it comes to calculating mortgage levels for limited company directors and self-employed applicants.
So it pays to use an experienced mortgage broker to find the best deal available to suit your particular circumstances.
Why choose Goldmanread?
At Goldmanread we have a vast experience built up over many years of arranging mortgages for limited company directors. As a specialist advisor, we can provide expert advice and use our industry contacts to present you with the very best mortgage rates from either a high street or specialist lender.
We know precisely which mortgage providers are comfortable using dividends for income multiple purposes, so we can achieve the maximum borrowing amount on your behalf. We can also pinpoint the best mortgage rates with the most competitive monthly repayments.
Contact us for free initial advice, we’d be happy to hear from you.