You might think that a company director’s position and standing status in the business world might count for something when it comes to securing the necessary mortgage advance for the purchase of a home fitting that status.
The reality might be far from it, so let’s take a look at why that might be.
Since the financial crisis of 2008 in particular, mortgage lenders have been decidedly careful about the ease with which they advance the funds for home purchase.
The test applied by those lenders takes the shape of an assessment of the affordability of the loan that is being requested. Affordability, in turn, is determined by most lenders according to relatively crude measures of income from employment and from any dividends or returns on investments.
The way in which this tends to work is described in more detail by the Home Owners Alliance, which also suggests some of the online calculators that are available to run precisely the kind of affordability check a regular mortgage lender might conduct.
So why might these affordability tests pose any difficulties when it comes to mortgages for company directors? Essentially, there are two quite closely related reasons:
- one is associated with many lenders’ difficulties in establishing income of the self-employed; and
- the other is related to the way in which they calculate the wealth of a mortgage applicant.
If someone is in employment, a mortgage lender might take comfort in the fact that there is a fixed salary that goes with the job. If necessary, the level of that salary may be verified by the employer of the mortgage applicant.
The self-employed on the other hand have no such reference to a fixed monthly salary, but rely solely on a self-declaration of their monthly disposable income – and, from that, their ability to repay any mortgage loan that may be advanced. Self-declaration is something that tends to make many mortgage lenders somewhat cautious and apprehensive.
That reluctance to advance a loan is only likely to be magnified if you are the director of a company that has been trading for only a short time and, therefore, does not have a long history of past accounts.
Added to this sense of wariness is the way in which income is likely to be calculated by most mortgage lenders – that is to say, according to the relatively crude measure of monthly income from employment and any regular return on investments.
This might seriously undervalue the company director’s actual wealth. For tax efficiency reasons or to maintain your company’s working capital, a company director is likely to retain a substantial proportion of profits within the company. But, by doing so, this element of wealth available to the company director is not take into account by many mortgage lenders when determining affordability.
Fortunately, there are ways of resolving these kinds of difficulties in securing the mortgage you need. These are likely to involve the help of specialist mortgage brokers with expertise and experience in identifying those lenders accustomed to putting their faith in the actual wealth and standing of the company director, rather than a crude calculation of income from employment and dividends alone.