Running a limited company often means being tax efficient. That may mean taking a lower salary and drawing dividend payments when it suits your cash flow or keeping profits within the business.
But when it comes to your personal life and getting a mortgage, you might have some questions.
- “Have I been too tax efficient?”
- “Will lenders ignore my dividends?”
- “Should I change my income setup before applying?“
If this feels familiar, you’re in the right place. Simmonds Mortgage Services has years of experience helping self-employed individuals and limited company directors get specialist mortgages, so we know what lenders look for.
In this blog, we’ll break down how lenders assess income, how dividend income is used for mortgage purposes, and what you can do to strengthen your borrowing power.
Or, if you’re looking for personalised advice, contact Simmonds today to discuss your options.
Does dividend income count towards a mortgage?
In many cases, yes, dividend income does get included in a mortgage application.
Many lenders are familiar with company directors who take a low salary and top it up with dividends. When it comes to mortgage assessments, lenders look at income differently than HMRC does. This means your tax-efficient income setup is usually not an issue, as long as your company is making a healthy profit and its finances are well-documented.
However, not all lenders treat dividend income the same way. Some have stricter requirements than others.
If you own more than 20% of the company (although this varies between lenders), most lenders will treat you as self-employed. That means they’ll assess your salary and dividends, using your HMRC tax calculations and tax year overviews, or your salary and share of net profit, using figures from your company accounts (before Corporation Tax or after, depending on the lender).
Even if a lender focuses on dividends, they’ll almost always request your company accounts. This is to make sure the dividends you’ve taken are supported by sustainable company profit.
And, while some lenders may consider just one year’s figures, most will want to see two full years of accounts or tax calculations to show stability and consistency.
Because of these differences, your borrowing amount can vary significantly from lender to lender, and sometimes by tens of thousands.
Example scenario: switching from salary to dividends and how it affects mortgage approval
Let’s look at an example because this is something we regularly see.
*This is a hypothetical scenario, but it’s a challenge we’ve seen for many clients.
Meet Mrs Smith
Mrs Smith bought her home 5 years ago using a standard residential mortgage. At the time, she was employed by another company, earning £55,000 per year on PAYE. This made the affordability assessment straightforward.
Last year, Mrs Smith left that role and became a director and significant shareholder (over 20%) of her own limited company. From that point on, mortgage lenders treated her as self-employed due to her shareholding and level of control over the business.
Her accountant advised restructuring her income for tax efficiency, so she reduced her salary to £10,000 and took the remaining £45,000 as dividends from company profits. This meant she paid less in National Insurance Contributions and enjoyed the tax benefits.
But now, Mrs Smith’s fixed-rate deal is ending, and she wants to remortgage.
How becoming a limited company director impacts mortgage affordability
If Mrs Smith simply does a rate switch (aka a product transfer) with her existing lender, there may be no new affordability checks at all. In that case, her income structure might not matter.
However, if she:
- Wants to remortgage to a new lender
- Borrow more money
- Release equity
- Or move home
…then her income will be reassessed under self-employed lending rules.
What this means
Once Mrs Smith became a director with significant shareholding, lenders stopped viewing her as a standard PAYE employee.
Instead, they now assess her using self-employed criteria.
Typically, lenders will look at:
- Her salary and dividends shown on HMRC tax calculations
- Her share of company profits shown in the limited company accounts
- Whether the dividends taken are sustainable based on company performance
And since she’s in the same line of work, many lenders will happily take one year of company accounts or tax calculations instead of the usual two years.
Mrs Smith’s position is extremely common. While her income hasn’t reduced overall, the way it’s structured means lenders assess her differently. Without understanding how director income is viewed, many borrowers assume their affordability has dropped, when in reality, it depends entirely on the lender and how the application is presented.
If you can relate to this situation or you’re facing something equally complex, contact Simmonds Mortgage Services. Working with our mortgage brokers can help you find lenders who view your income sources in the most ideal way, so you’re not penalised for being tax efficient.
How lenders assess income for limited company directors
Mortgage lenders have various ways of assessing income for limited company directors, and the method they use can make a huge difference to how much you can borrow.
If you own at least 20% of the company, lenders will treat you as self-employed.
Below are the main approaches lenders use.
Salary and dividends
Most lenders start by assessing:
- Your basic salary
- Plus your dividend income
This is the most common approach, and it works well if you consistently pay yourself dividends and your tax bills are up to date. But it’s important to remember that you may need at least 2 years’ worth of dividend payments to meet lenders’ expectations.
Salary plus net profit
Some lenders are more flexible and look at your share of the company’s net profit (either before or after Corporation Tax), plus your salary. These lenders are aware that “income” doesn’t always match what you withdraw from the business and that your ability to pay a mortgage is backed by your company’s overall strength.
This approach can help you borrow more, especially if:
- Your company retains profits instead of distributing them
- You take a low salary
- You draw dividends irregularly
- You structure your income for tax efficiency
Average earnings
Many lenders average your income over the last 2-3 years, especially if it fluctuates. This is a good approach if one year’s profit dipped, you had a slow trading year, or you only recently switched to dividends.
But this approach can also reduce your borrowing if your income has changed significantly.
How does mortgage affordability work for company directors?
Mortgage affordability is based on what lenders believe you can reasonably afford each month. Every lender does mortgage affordability calculations differently. That’s why your borrowing power can look different from one lender to the next.
As a company director, lenders usually want to see:
- 2 years of full company accounts
- 2 years of HMRC tax calculations
This shows proof of your salary and dividend income. Some lenders will also require a signed accountant’s certificate to show proof of your business finances.
They don’t usually want payslips.
Lenders can also take into consideration any other income, such as rental income.
Will retained profits help my mortgage affordability?
Most mortgage lenders usually assess your suitability for a mortgage based on your personal income (so your salary plus any dividends you take from the company). They tend to see retained profits as money that belongs to the company, not you.
But as a director, you’ll likely have access to funds from the company if needed. Some lenders are more flexible and understand this. They assess your mortgage affordability based on your income and your share of the company’s profits, helping you get a larger loan amount, even if most of your income remains in the company.
7 ways to improve your borrowing power as a company director
While it can be tricky finding the best deal when you’re self-employed or running a company, there are practical ways to strengthen your mortgage application.
- Check your credit score and make sure the information is accurate
- Keep your accounts up to date and your documents organised
- Work closely with your accountant and be clear about your personal financial goals
- Regularly review your company’s profit margins and financial strategy
- Have your supporting documents ready for the mortgage application
- Consider lenders who align with your income setup
- Work with a mortgage broker who specialises in self-employed mortgages
Looking to get a mortgage with dividend income? Speak to Simmonds Mortgage Services
At Simmonds Mortgage Services, we often work with self-employed clients. As specialised mortgage advisors, we understand exactly how different lenders assess income and what they look for when working with limited company directors. We’ll help you identify lenders that take a flexible approach to salary and dividends, and we’ll make sure your application is fit for approval.
Call Simmonds Mortgage Services on 01184 693 037 or book your meeting online to discuss your mortgage options and see how much you could potentially borrow with dividend payments.
Read more: Should I buy property in my personal name or a limited company?
