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Mortgage Multiples and Small Company Directors

I'm a Chartered Engineer and I run my own company (one man company) working on large contracts.

I recently went to look into getting a new mortgage and found the following when used to work out multiples as self-certs have disappeared. Most places offer between 3.5 and 4.5 income as such:

Employed: 4.5 x gross annual salary
Self-Employed: 4.5 x net profit
Director: 4.5 x (salary plus dividends)

The problem with this is that, as a one person company, I chose to pay myself a small salary and reward myself by paying dividends if the company makes a profit. I chose not to take all my net profit out in the last two years and only declared dividends that I needed to live on, keeping the rest in the company so as to reduce my potential tax liability (as any good accountant will tell you) and cover myself in case business was slow.

For some reason, mortgage companies don't take this into account, so although my net profit was significantly higher than the dividends I chose to take out and I have a 25% deposit, this isn't taken into account when working out multiples. Is this normal practice?

Comments

  • Hi.. Not really answering your question, but I know one of my bosses had the exact same problem with small salary/dividends

    He was having probs with HSBC, and I know Direct Line have been really good for him, and I he said their application form really goes into the relevant detail for company directors,

    Maybe give them a try?
  • racmac
    racmac Posts: 17 Forumite
    We have the same issues and got a mortgage with C & G no problem - they do take the dividends into account.
  • Hi,

    Its not the dividends that's the problem.

    When my company shows a net profit, I can take that value (minus corporation tax) out as dividends but I don't have to take all the money out.

    The banks seem to only look at salary plus dividends. They don't take into account net profit (or money I could have taken out but didn't to minimise my personal tax for that year) as they would with a self employed person so the multiple offered is much smaller compared to a comparable self employed or traditionally employed person.

    For example -

    £66k in dividends gives rise to a 6k tax bill.
    £90k salary gives rise to a £30k tax bill.

    Both people get £60k net income to spend paying back a mortgage and living. The banks will give the 90k salary person a much bigger mortgage (4.5 x 90k) than the person earning 66k dividends (4.5 x 66k) even though they both have the same spending power!
  • opinions4u
    opinions4u Posts: 19,411 Forumite
    When I was underwriting mortgages for the self employed I used the accounts and proof of income / dividend payments to calculate what the net profit of the business was before payments to the owner.

    Then applied whatever income multiplyer was appropriate.

    Absolutely no reason why a lender can't still do this.
  • pusscat
    pusscat Posts: 386 Forumite
    I am an IT contractor so have the same issues. Don't know if I am allowed to post links, but there are specialist contractor brokers who arrange this kind of thing all the time for IT contractors.

    I have a standard high street product that was worked out on a multiple of my hourly/daily rate - google using "contractor mortgage" and you will find plenty of brokers.

    I assume that they work with other contractors too - certainly worth an ask!
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