Can you get a mortgage using retained profits?

Are you looking for a mortgage that uses your retained business profits?

You’ve come to the right place! We understand how important it is for business owners to access their hard earned money, and our team of expert brokers have a track record of making it happen.

Let us show you how we can help you secure a retained profit mortgage.

What are Retained Profits?

Retained Profits are the profits that remain in a limited company after dividends have been distributed to shareholders.

This is accumulated trading profit that is owed to the company owners and will be shown within the company accounts under Profit and loss reserves.

Shareholding directors are in a unique position as they can decide how much income to withdraw from the business and when. If income is not needed, or perhaps would trigger a larger than normal tax bill, it is simply left in the business for another time. You don’t pay dividend tax on dividends that aren’t paid out.

It’s common for shareholders to accrue substantial sums in their limited companies, as undrawn profit.

While it is possible to use this profit to support a mortgage application, many lenders may be reluctant to do so since there is a risk that difficult trading periods could result in those profits being consumed by the business.

Company director income

Taking a small salary and using the majority of profits to pay yourself in dividends can be beneficial from a tax perspective, leaving excess money in the business for another time.

What options do you have if your salary and dividends combined don’t provide enough evidence that you can afford a mortgage? Fortunately, some lenders are more understanding of how company directors receive their income and will recognise the retained (residual) profits in a business as additional earnings.

Mortgage lenders typically assess affordability for business owners by taking into account their salary and dividend income. However, often the retained profits are greater than the combined total of dividends and salary – in this case, using the amount of retained profits could lead to a larger borrowing limit.

So a company director’s income could then include:

• salary
• dividends
• and retained profits

This means you may be able to borrow more than initially thought.

Can I get a mortgage using retained profit?

Yes, using your retained business profits to secure a larger mortgage is a completely valid method.

Self-employed borrowers may assume that obtaining a mortgage is more difficult than for those who are employed, but this is not necessarily true.

In terms of loan to value, a deposit of 40% is generally required to access the most favourable rates. Even with a 15% deposit, it is possible to find competitively priced mortgage rates.

The key is using a mortgage broker that is experienced in helping self-employed borrowers, particularly shareholding company directors.

Our mortgage brokers have strong connections with specialist lenders, allowing them to assess your case on an individual basis. Rather than relying on automated systems, these lenders can take into account the entirety of your situation before making a decision – potentially helping you to secure a mortgage that would be rejected by other providers.

Many lenders view retained business profits as your own money, regardless of whether you decide to extract them as dividends or not.

Affordability

It’s all very well having large reserve sums showing in your accounts but you still have to demonstrate that you can afford the monthly repayments.

When assessing affordability, lenders will consider:

• Your actual income and outgoings – both personal and business.
• Financial commitments such as existing mortgages, credit cards, loans etc.
• Your age at the end of the mortgage term
• Any other relevant information that could potentially affect your ability to make repayments.

The lender’s affordability assessment will also be based on a stress test, evaluating your income and outgoings in the event of an interest rate rise. This is to ensure that you can still make the required payments even if interest rates go up during the term of your mortgage.

What this means in practise is that the lender needs to see you drawing enough money out of the business, dividends and salary, to maintain your current lifestyle and financial commitments, whilst also being able to afford the new mortgage arrangement.

How much can you borrow?

The actual amount you can borrow will always come down to your own provable income, outgoings and affordability.

But let’s look at a simple example:

• Limited Company
• One shareholder/director
• £100,000 retained profit
• £9,000 PAYE salary
• £40,000 dividends

The shareholders actual gross income was £49,000 (9k + 40k). These amounts were taken to minimise personal income tax but still provide for a preferred standard of living.

Most mortgage lenders would use just the £49,000 when calculating the mortgage, as this was the amount actually paid out.

£49,000 x 5 multiple = £245,000 mortgage

But a lender that understands how dividends and profit reserves work, would be able to bring in the undistributed profit:

£49,000 + £100,000 = £149,000

£149,000 x 5 multiple = £745,000

In this example the maximum mortgage has been increased by 200%!

In many cases, you’ll have the option to use a blend of your salary in addition to either dividends or net profits when determining the amount you can borrow.

How do I prove my income?

Many potential lenders will ask to see proof of the last three years worth of income. Preferably this will be from Self Assessment tax calculations (SA302), Tax Year Overviews (TYO) from HMRC, or trading accounts.

Lenders may also ask your accountant to complete a certificate confirming your earnings.

Where the accounts or SA302 don’t clearly show the most recent income position they may also ask for recent copies of bank statements, for yourself and the business.

When lenders assess income over a number of years the income used for the mortgage will be an averaged figure. This can cause the loan amount to decrease. Another option may be to approach a lender who looks at the last years income only.

Interest rate options

When applying for a mortgage you will have the following types of interest rate to choose from:

• Fixed rate
• Tracker rate
• Variable rate

Fixed rates are a popular choice as they allow you to fix the interest rate for a period of time, meaning that you’ll know exactly how much you need to pay each month – regardless of any movements in the Bank of England’s base rate.

Trackers move up and down with the Bank of England’s base rate. The advantage of this type of mortgage is that you could benefit if interest rates fall, but you’ll still need to be prepared for possible increases too.

Variable rate mortgages are those that don’t offer any kind of fixed rate deal and the interest you pay can move up or down in line with market conditions.

Whichever type of mortgage you choose, it’s important to make sure that you’re able to cope financially should interest rates go up during the life of your loan.

Repayment methods

Mortgages will usually be set up on a repayment basis, meaning that you’ll need to make regular payments over the agreed term in order to repay the loan – and any associated costs – in full.

In some cases, lenders may offer interest only payment options which could suit those who are looking for a more flexible approach or who already have significant existing financial commitments.

However, you’ll need to be aware that with interest-only mortgages you’ll still need to pay off the original loan amount at the end of the term, which could mean a lump sum payment or further borrowing.

If you’re unsure about what repayment options might work best for your circumstances – it’s always best to seek independent advice from an experienced mortgage adviser.

Are these mortgages available if I have bad credit?

Yes, some lenders may still offer mortgages even if you have bad credit. However, these mortgages typically come with higher interest rates and more stringent terms and conditions than standard offerings.

It’s worth noting too that lenders will take into account factors such as your current financial situation and any other existing commitments in order to decide whether you can afford the loan or not.

If your credit rating is less than perfect – it’s important to get yourself back on track before applying for a mortgage. The best way to do this is by making sure all of your bills are paid on time, setting up payment plans where needed and keeping old debts separate from new ones.

A good broker can also help you understand which lenders may be more likely to accept your application and how you can improve your chances of getting the best deal.