Numerous limited company directors are falling foul of a lesser-known variation in how mortgage lenders assess self-employed income, a mortgage broker has warned.
Jamie Elvin, director of Strive Mortgages, which specialises in mortgages for the self-employed and limited company directors, said entrepreneurs wrongly assumed every lender would assess their income in the same way.
Jamie said: “Many business owners deliberately keep their salary and dividends low for tax efficiency, leaving profits within the company. When they then come to apply for a mortgage, the problem is that many lenders will only assess the income you’ve actually drawn when deciding how much they will lend to you. They’re then left disappointed and don’t know that there are other lenders out there who will also take into account their share of the company’s net profit.”
As an illustration, Jamie said he recently dealt with a client where the maximum lending varied from approximately £225,000 with one provider to nearly £600,000 with another.
He added: “The difference wasn’t the client’s income or circumstances – it was simply how each lender chose to assess that income.”
Jamie said numerous directors hold back profits to bolster cash reserves, reinvest into the enterprise or reduce tax liability, rather than due to an inability to extract more funds. He added: “It’s one of the biggest misconceptions we see when arranging mortgages for the self-employed. Business owners often think they’ve reached their borrowing limit, when in reality they’ve simply approached a lender whose criteria doesn’t suit their circumstances.”
Jamie suggested that encountering an apparent borrowing ceiling could prompt business owners to make choices they might subsequently regret.
He added: “Some business owners then consider increasing their salary or paying themselves larger dividends purely to improve their mortgage affordability. In many cases, that can create an unnecessary tax liability, when the better solution is simply choosing a lender that assesses retained profits as part of the affordability calculation.”
Jamie cautioned that consulting just one bank could provide business owners with an entirely inaccurate impression of their borrowing capacity – and that it’s essential the self-employed understand which lenders to contact.
He added: “For limited company directors, lender criteria can vary dramatically. Choosing the right lender can genuinely mean the difference between missing out on your ideal property and being able to buy it, without changing anything about your business or the way you pay yourself.”
