Getting a mortgage - easier as sole trader or company director?

Linguistin

Hi everyone,

I'm currently working as a sole trader, but would like to incorporate to a limited company, register for VAT and generally progress my business.

However, as a company director I get the impression it would be a lot harder to get a mortgage, and I am desperate to buy! As a sole trader, my salary this year should be around £70-80k, but as a company director my "salary" would only be around £8k whilst taking more out of the company as dividends.

I know the mortgage borrowing calculator on here is made for the employed, but I get different figures if I put in a salary of 70k and a salary of 8k + a £62k bonus (in that I can borrow a lot more when my salary is 70k).

Essentially, when you are a company director on a seemingly low salary is it possible to get a decent mortgage? Or should I get a mortgage as a sole trader with a "higher salary" as quickly as I can then convert to being a limited company?

Any advice much appreciated!

ACG

As a ltd company director, lenders usually take PAYE (£8-12k ish depending on your accountant) and the dividends or net profit - depending on the lender.

If you go limited, there will be lenders who will accept you in the same way as if you stayed as a sole trader...I am moving house next week, I have 3 years accounts, 2 as a sole trader and one as a ltd company and I have got normal mainstream rates.

However, if you can wait, you will probably have a couple of extra options - not enough to make a massive difference but every little helps as Tesco tell us.

Linguistin

Ok, that is kind of what I expected. Quite infuriating always being penalised in some way for being self-employed but hey ho!

For your three years of accounts, did they take an average of the earnings over the three years? The problem for me is that each year I have big salary jumps (I know that doesn't sound like much of a problem!) and could get a decent mortgage on 70 or 80k but not if my average were lower.

Oh well, time to get saving as much as possible!

trailingspouse

OH and I are company directors, and we do indeed pay ourselves a small salary (to use our personal allowances) with the rest of our income coming as dividends.

When we bought our house 4 years ago, we had to provide 2 years' audited accounts.

A mortgage broker will help you to find the best deal.

dunstonh

Most common method is for directors to be paid upto the lower earnings limit (£680pm) and anything above that in dividends as that is the most tax efficient way. You avoid paying NI but still qualify for NI and you still use your personal allowance in full as well as the dividend allowance.

Using the same business name when you incorporate will help as well as using the same bank (at least to begin with). It helps the audit trail to show continuation despite the new company being a new legal entity.

ACG

Linguistin wrote: »

Ok, that is kind of what I expected. Quite infuriating always being penalised in some way for being self-employed but hey ho!

For your three years of accounts, did they take an average of the earnings over the three years? The problem for me is that each year I have big salary jumps (I know that doesn't sound like much of a problem!) and could get a decent mortgage on 70 or 80k but not if my average were lower.

Oh well, time to get saving as much as possible!

Most will average the last 2 years accounts. Some lenders will use the latest years figures. The more flexible you can be, the more/better options you will have.