Salary and Dividends or Salary and Net Profit
Matt Poole ??
Mortgage Expert for Business Owners | Simplified, Fast-Track Solutions Using Your Business Profits - Not Your Personal Income!
If you're a Limited Company Director you are in the fortunate position of having more options available than most when looking at mortgage lending.
Lenders will assess your income in one of 2 different ways:
- Your Salary and Dividends
- Your Salary and Net Profit of your business
If you are a Director of a Limited Company and you have more than 25% share in the business then both of the above options will be available to you. It then comes down to working out how you can maximise your borrowing potential.
When looking at both options the lenders will work the same way. They will always look at a 2 year track record of your earnings.
If you're figures are increasing year on year then the lender will take an average of the latest 2 years
If your figures are decreasing year on year then the lender will take the latest lowest years figure for affordability. If profit is decreasing be prepared to provide an explanation why there is a decrease.
When looking at your options there can be a SIGNIFICANT difference when looking at the different routes.
For example if you have a 2 year average income of ￡40,000 Salary and Dividends. As outgoings there is a ￡350 per month car finance and a credit card balance of ￡5,000. Potential borrowing on this scenario comes in at ￡145,365 over a 25 year term.
If you have a salary of ￡8,500 and average net profit of your business of ￡70,000 over the latest 2 years with a ￡350 car finance and ￡5,000 credit card balance then the potential borrowing over 25 years jumps up to a MASSIVE ￡372,850.
If you are planning a mortgage in the near future always make sure you discuss this with your accountant as there is potentially no need to dramatically increase your salary and dividends to be able to afford a higher mortgage. You will have the options to use your company net profits and keep your personal tax bill down.
If you are speaking to a mortgage broker about your mortgage options always make sure they have a full understanding of your circumstances so they are able to give best advice. A good broker should ask for your latest personal tax returns along with latest company accounts. This way you can make sure you are maximising your potential.
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