Directors often face unique challenges when applying for mortgages. Their income structure, combining salary, dividends, and retained profits can be confusing for traditional lenders.
Here’s how mortgage advisers can navigate this scenario and unlock the best mortgage options for their director and self-employed client base.
While income is crucial, a strong business track record with healthy profits and minimal debt bolsters application credentials. Presenting well-organised financial statements – SA302s and tax year overviews – showcases responsible financial management.
Understanding the nuances
Most lenders prioritise salary and dividends when assessing affordability. Retained profits, the company’s undistributed earnings, are often overlooked due to concerns about future business needs. However, for some directors retained profits represent a significant, accessible source of income.
Using a broker to assess a lender’s individual criteria means we can look for lenders that consider an average of director’s remuneration and dividends over multiple years. This paints a clearer picture of consistent income compared to just focusing on the most recent year.
This highlights stability in income which many businesses won’t have due to the nature of their chosen profession – an average over two years’ accounts is the industry standard.
Seek advice
Another option to maximise loan potential is to speak with the company accountants. Providing they have the accredited qualifications, they can issue an Accountant’s Reference, confirming the ability to withdraw retained profits as dividends without harming the business.
This reassures lenders about future affordability and is now common practice in all director-led applications for mortgage providers. Advisers can also research specialist lenders who cater for self-employed individuals and understand the nuances of director income. These lenders may be more flexible in considering retained profits when assessing affordability constraints, but remember, not all lenders are created equal.
By understanding these income streams and presenting them strategically, mortgage advisory firms like Dwello can significantly improve loan approval chances for their director clients along with the maximum loan amount available to them.
Remember, clear communication and comprehensive documentation are key to unlocking the full borrowing potential of a director’s income.
