For many business owners, acquiring a mortgage can be a daunting task. Despite the substantial wealth accumulated within your company, traditional mortgage lenders often face difficulties in accommodating unconventional income structures. Fortunately, there are effective, lesser-known strategies designed to help you unlock your business’s financial potential and secure the home of your dreams.
Understanding Mortgage Challenges for Business Owners
Business owners frequently structure their income for tax efficiency. This commonly involves drawing a modest salary while supplementing their income with dividends, often leaving a significant portion of profits within the company. While this strategy reduces tax liabilities, it can complicate the mortgage application process.
Traditional lenders typically assess affordability based solely on personal income, primarily focusing on salaries and dividends, and often overlook retained profits. Consequently, many business owners discover that they qualify for much smaller loans than their financial circumstances would suggest.
Three Solutions for Increasing Your Borrowing Potential
The good news is that some specialized lenders acknowledge the unique financial situations of business owners. Below are three strategies that could open doors to larger mortgage amounts.
1. Utilizing Retained Profits as Income
Instead of relying solely on personal salary and dividends, certain lenders may factor in your company’s net retained profits. This approach provides a more comprehensive view of your true earning potential, potentially increasing the size of the mortgage for which you qualify.
2. Customizing Accounting Periods for Stronger Financial Presentation
Another viable strategy involves working with your accountant to adjust your accounting periods. If your company has recently experienced a surge in profits, you can present a stronger case to lenders by extending your accounting period. By including additional months of elevated earnings, you enhance your appeal to lenders.
Example: If your e-commerce business enjoyed an exceptionally profitable six-month stretch, your accountant might extend your accounting year to 18 months to include this additional income. This strategy will yield a higher average profit, calculated pro rata for affordability, thereby improving your chances of securing a favorable loan offer.
3. Leveraging a Director’s Loan for Your Down Payment
If you plan to utilize business funds for your mortgage deposit, consider taking a director’s loan to effectively manage your personal and business cash flow. This interest-free loan requires repayment within the same financial year, allowing flexibility. Your accountant can later reclassify this loan as a dividend during the next tax year, spreading the tax liability over a more manageable timeframe, potentially delaying payment for nearly two years depending on your mortgage application timing.
Many business owners remain unaware of these options. Engaging with traditional lenders can often lead to frustration, as large banks typically focus on standard mortgage applications and may overlook unique financial situations. This is where specialized lenders shine, as they take a comprehensive view of your affordability and utilize a common-sense approach to facilitate the process.
Who Can Benefit from These Strategies?
Many business owners experience irregular income structures, which may not align with traditional mortgage criteria. This situation is particularly relevant for:
- Contractors and freelancers: With fluctuating monthly incomes from project-based contracts, proving consistent earnings can prove challenging.
- Small business owners: Many draw lower salaries and depend on dividends, often leaving profits within the business for growth.
- Directors of limited companies: Despite significant business success, retained profits may create the perception of low personal income.
- Seasonal or cyclical businesses: Companies that experience income variability may struggle with traditional lender evaluations that don’t consider retained profits.
Leveraging retained profits or utilizing a director’s loan can provide essential cash flow for personal needs, such as purchasing a home. This approach allows business owners to maintain their tax-efficient income structures while accessing the borrowing potential that their business can support. For those with unpredictable earnings, such as freelancers or consultants, these solutions can bridge the gap between their actual financial health and lender assessments.
Key Considerations Before Proceeding
Before committing to these strategies, keep these essential tips in mind. It’s rare to find high street mortgage lenders who accommodate such sophisticated applications, so seeking guidance from a qualified mortgage broker and accountant is critical.
- 1. Collaborate with a Specialist Mortgage Broker: A broker well-versed in complex income structures can connect you with lenders who adopt a broader perspective on your financial situation.
- 2. Maintain Organized Financial Records: Ensure your company’s accounts are meticulously organized and up-to-date, as lenders will require detailed documentation to evaluate your application.
- 3. Plan Strategically with Your Accountant: Proper timing is crucial. Coordinate with your accountant to optimize how your income is presented while ensuring compliance with tax regulations.
- 4. Affordability Remains Essential: While these strategies can enhance your borrowing potential, lenders will still assess affordability to confirm that you can comfortably manage repayments. Responsible borrowing ensures you avoid falling into excessive debt.
Determining whether these techniques are suitable for your circumstances depends on various factors, including your business structure and personal accounting practices. However, leveraging your company’s profits for mortgage purposes is not only possible but can also yield significant benefits when approached thoughtfully.
This article does not constitute financial advice, and we recommend consulting a qualified accountant and financial adviser before making any mortgage decisions.
Luther Yeates is the Head of Mortgages at UK Expat Mortgage.
Additional Resources
A Guide to Small Business Funding: Loans, Eligibility, and Applications – This comprehensive guide simplifies the complex task of applying for business funding.
Marketing Planning: Maximizing Your Business Exposure – Insights from company owners who prioritised strategic marketing efforts to enhance their visibility.
Can You Have a Company Car if You’re Self-Employed? – Essential information about company car ownership for self-employed individuals, explained by Mike Parkes of GoSimpleTax.
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