Mortgages Using Retained Profits: A Guide for Directors
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Is a Retained Profit Mortgage Suitable for You?
This approach is highly suitable for any limited company director who leaves substantial funds within their business. If your company generates significantly more profit than you draw out personally, a retained profit mortgage is likely the best route to securing the property you want.
This strategy is particularly relevant across specific sectors.
Who Benefits from Retained Profit Mortgages?
Directors of successful consultancies often have low overheads and high profit margins. They frequently retain profits to build a war chest or manage tax brackets, making them ideal candidates for this type of mortgage assessment.
Directors in these sectors often leave profits in the company to fund the next development project or purchase materials. A specialist lender understands that this retained capital demonstrates business strength, not a lack of personal affordability.
Tech founders who have reached profitability often reinvest heavily or retain profits to boost company valuation. They need lenders who look at the underlying health of the business, not just a modest PAYE salary.
Key Financial Risks of Standard Assessments
Approaching a standard high-street bank as a director with retained profits often leads to frustration and disappointment.
If a bank only looks at your £12,570 salary and £37,700 in dividends, they will calculate your maximum borrowing based on an income of £50,270. This severely limits the type of property you can purchase.
To secure a larger mortgage from a standard lender, a director might be forced to draw a massive dividend in a single tax year. This triggers higher or additional rate dividend tax, resulting in a completely unnecessary and expensive tax bill simply to satisfy a rigid lending algorithm.
How Specialist Lenders Work
Unlocking Your True Affordability
Specialist lenders take a holistic view of your financial position. Instead of looking at your personal tax return (SA302), they look at your company accounts.
The calculation typically works like this:
Director’s Salary + Share of Net Profit After Corporation Tax = Assessed Income
If you own 100% of a company that generated £150,000 in net profit, and you took a £12,000 salary, a specialist lender will assess your income as £162,000. This dramatically increases your borrowing multiplier compared to a high-street bank that only sees the £50,000 you actually drew.
Case Studies
Key Considerations
Preparing for Your Application
To successfully apply for a mortgage using retained profits, you need to be prepared:
- Trading History: Most specialist lenders require at least two years of finalised company accounts, though some will consider applications with just one year of exceptional trading history.
- Shareholding: You typically need to own a significant percentage of the company (usually 20% or more) for lenders to consider your share of the retained profits.
- Accountant’s Reference: Lenders will often require a reference or projection from a certified accountant to verify the sustainability of the profits.
Speak to a Broadbench Specialist
Don’t let a rigid lending algorithm dictate the home you can buy. You have built a profitable business; your mortgage should reflect that success.
Speak to a Broadbench mortgage specialist today to find out exactly how much you can borrow using your retained profits.
FAQs
What is an independent professional mortgage?
It’s a standard mortgage but assessed differently. Lenders consider your annualised contract rate instead of traditional income methods, helping independent professionals borrow based on true earnings. A specialist broker can help you access competitive rates.
Read our A-Z of Mortgage Terms.
Can I get a mortgage as a contractor?
Yes. While most high-street lenders struggle to assess contractor income accurately, specialist lenders can assess affordability based on your day rate or contract value. Broadbench works with lenders who understand contractor income structures, helping you borrow in line with your actual earning capacity rather than being limited by payslip-based assessments.
Does IR35 affect my mortgage application?
Yes. Your IR35 status affects how lenders assess your income. Outside IR35, specialist lenders can use your day rate to calculate affordability. Inside IR35, your employment income from your umbrella company or client payroll is used. In both cases, Broadbench will identify the lender and assessment method that gives you the most favourable outcome.
Can I get a mortgage if I earn a day rate, rather than PAYE?
Yes. Of course, there are factors that impact a contractor’s eligibility, but just by being self-employed, you should not expect to be turned down by a lender as long as they understand contractors and contracting. However, factors that would prevent anyone from securing a mortgage, such as a poor credit history or a bad payment record will apply just as much. to contractors as to employees.
Can I get a mortgage if I have only just started contracting?
Yes! As long as we can see you’ve got a history in the same line of work and in the same industry in which you are now contracting, there are lenders who accept new contractors.
Read our A-Z of Mortgage Terms.
What is a freehold?
The freeholder of a property owns it outright, including the land it’s built on. If you buy a freehold, you’re responsible for maintaining your property and land, so you’ll need to budget for these costs. Most houses are freehold but some might be leasehold – usually through shared-ownership schemes.
Why should I use a specialist Contractor broker?
By all means, go to a high street lender to satisfy your curiosity, but in most cases, the lender will have issues with how income reaches the contractor. High street lenders understand dividends, but business owners, professionals and contractors who are tax efficient and only draw down a minimum salary and dividends to meet their needs won’t look good. Specialist brokers like us go to the same lenders you see in the high street but at the head office underwriter level. This means they are speaking to people with a bigger lending mandate and a knowledge of this sector contractors, and they use the contract to define a contractor’s income.
Do I need three years of company accounts before I apply?
Lots of contractors have the misconception that they cannot get a mortgage without three years of accounts. Whereas that might have been the case several decades ago, this is certainly no longer true.
Stop Letting Your Tax Strategy Limit Your Mortgage
Fill out the form below to arrange a time to speak to a Broadbench adviser who specialises in Mortgages assessed on retained profits.