Using Net Profit criteria for mortgage affordability for shareholding directors.
Want to know how you can borrow more using your Net Profit for a mortgage then you have come to the right place. Traditionally Mortgage Lenders have looked at the directors’ remuneration (salary) and dividends drawn when assessing affordability of a residential mortgage. This blanket approach makes sense for majority shareholders but it is a nonsense if you (or you and your spouse) own 100% of the shares in the company as effectively the money is used regardless of whether it’s sitting the company bank account or your personal one.
More recently, some Mortgage Lenders have been waking up to this situation and factoring in net profit in this instance. It was a breakthrough moment but the good news with the help of good Mortgage Broker, such as Niche Advice, we can take it a stage further. How so? Well read on if you want to find out how to borrow more.
At Niche Advice we are able to access a Mortgage Lender that works off Net Profit Before Tax (known as Profit on ordinary activities before taxation) for Company Directors who own the business. In addition, the latest accounts figure is used rather than an average over the last few years. The results can be startling, as the table below is used on a standard 4.5 times income multiple.
Case scenario.
Joseph is runs a technical drawing firm. He lives by himself and has seen on reason to draw unnecessary money out of his limited company, preferring to keep the balance sheet looking healthy. This year his firm made £200,000 profit for the year, £180,000 after taxation. He paid himself £10,000 salary and £40,000 dividends.
The previous year £150,000 profit for the year, £135,000 after taxation. He paid himself £10,000 salary and £25,000 dividends.
[ezcol_1third].[/ezcol_1third] [ezcol_1third]Taken a 2 Year Average[/ezcol_1third] [ezcol_1third_end]Taking Last Year’s Figures[/ezcol_1third_end]
| . | Usable income | Maximum mortgage based on 4.5 times multiple | Usable income | Usable income |
| Traditional method | £42,500 | £191,250 | £50,000 | £225,000 |
| Profit for the financial year | £157,500 | £708,750 | £180,000 | £810,000 |
| Profit on ordinary activities before taxation | £175,000 | £787,500 | £200,000 | £900,000 |
That’s right the traditional method of salary plus dividends averaged gives you a maximum borrowing potential of £191,250, whereas the new improved method of Profit before tax in combination with last year’s figure produces £900,000. That’s right a whopping £708,750 more!
Niche Advice offers appropriate advice to Company Directors looking to obtain the maximum mortgage. To find out how we can help you please complete the Contact Form on this website or call T: 020 993 2044.
Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Mortgage Brokers. His role is very much focused on Property financing both on residential and commercial lines. To get in contact with him please click here.
