Getting a mortgage with business retained profits
If you run a business, it’s not always prudent to take all the profit as part of your salary or dividends. Instead, for tax reasons, you’ll likely be encouraged to keep what you don’t actively need for your personal obligations within the business, drawing on it as and when required.
However, when it comes to mortgage applications, you will appear less financially successful when your worth is judged on the strength of your drawings. Sadly, mainstream lenders rarely take the success of a shareholder or director’s business into account, and that’s where a retained profit mortgage is invaluable.
What is a retained profit mortgage?
First, let’s determine what retained profits are.
If you’re a business owner, sole trader, freelancer, company director, or landlord, it’s more than likely that you’ll need a set of company accounts to manage your financial affairs.
It could be because your clients expect a particular level of company operations rather than trading with an individual, or you need the protection of limited liability, or you earn above the limit that demands you become a director or shareholder of a limited company.
In such cases, it’s often prudent to pay yourself a smaller salary, as it’s tax-deductible to the business, then make up that salary with dividends that are subject to lower tax rates and aren’t applicable for National Insurance. The remainder of the year’s profits remains the business's, for the time being, as ‘retained profit’.
Do mortgage lenders consider retained profits?
Some do, but they’re rarely the mainstream lenders or high street banks.
The type of lender that considers retained profits as part of their mortgage calculations is typically a smaller, specialist operator. They take into account the person behind each application, examining the details of their income and worth on a case-by-case basis.
A retained profit mortgage takes a business’s unpaid profit into account when calculating how much the borrower can expect as their total loan amount. Where a company’s retained profits are high, it can significantly improve how much an applicant can borrow, entertaining the possibility of much more desirable homes and preferable purchases.
Example of a retained profit mortgage
To keep the figures simple, let’s say a business had a turnover of £500k, and half of that (£250k) was the profit after paying everyone’s wages and covering all operational expenses.
To take advantage of lower taxes, the business owner paid themself a £10k salary and a further £40k in dividends. From a mortgage lender’s point of view, the business owner’s yearly income was £50k. So, they offer them a loan based on four times their salary, resulting in a £200k mortgage (assuming the deposit, credit checks, and affordability assessments all go to plan, of course).
Given the business has been doing so well over the past few years, the operator knows they can afford to meet payments on a far higher mortgage and has already set their sights on bigger and better properties. What can they do?
With a lender willing to provide a mortgage that caters for the business’s retained profits, they will be entitled to a far higher figure. But, as we’ve said, not all lenders will include the option, so finding one that does is a job for an experienced, specialist mortgage broker.
With their new and accommodating lender in the mix, the business’s retained profit of £250k is now available for consideration. Four times the new figure provides a mortgage loan of £1 million. So now, the business owner can happily meet the costs of the home they’d initially set their hearts upon.
Can I get a mortgage with retained business profits?
As with any mortgage, each borrower must provide proof of income and meet the affordability assessments of their lenders. Borrowers hoping to utilise retained earnings for their application are no different. They’ll also need to provide an appropriate deposit and pass the lender’s credit checks.
Typically automated mainstream mortgage applications don’t feature the checkboxes or input fields for such a specialist situation. This prevents approval algorithms and computer processes from taking any such missing sum into account, preventing those banks and lenders from offering the higher loan amount the applicant is more than capable of repaying.
A specialist mortgage broker will match you to a far better-positioned lender, helping you to achieve the mortgage loan you deserve. You’ll need to provide up to 3 years of company accounts, proof of your monthly spending and money management, and the required credit score.
Retained profit and net profit mortgages
The terms retained profit and net profit are often used interchangeably in mortgage situations. However, there are specific differences that should help borrowers understand a little more about their part in the process.
The net profit is the amount the business earned after subtracting all the costs and expenses from the total revenue. The net profit is found in the statement of profit and loss.
The amount left after the tax is deducted from the net profit is the retained profit or retained earnings. Retained earnings are usually used to support any business expansion, additional plans, or to pay shareholder’s dividends and are located in the statement of changes in equity.
When considering retained earnings and net profit mortgages, it’s crucial to understand the details of each offer and which figures the providers take into account, whether considering profits made before or after tax.
Each lender operates in their own way, so ensuring you provide precisely what they need is crucial to a successful application. Again, working with an experienced mortgage broker will take all the guesswork out of the process.
Tips for getting a retained profit mortgage
As with any mortgage application, the better prepared you are, the easier it will be to meet your mortgage broker's and potential lenders' requests.
Lenders prefer to see accounts prepared by a professional accountant. Some providers will work with as little as a single year’s figures, but most would rather see three. It’s a good idea to have more years of accounts available than you need. When applying for a mortgage, more information is always better than not enough.
Potential lenders will need to see your personal bank account statements to corroborate your affordability assessment. Therefore, having both sets of bank accounts, credit cards, and other finance and credit statements will be expected, just as they would with any traditional mortgage application.
Again, as with conventional mortgage applications, poor credit will affect your success or the interest rates on offer. So, optimise your credit report and credit score wherever you can to attain the best chance of preferable interest rates and the highest loan amount.
Check your eligibility for a mortgage using retained profits
You'll need to speak to a mortgage broker to determine if you’re eligible for a retained profit mortgage. The type of specialist lender required to underwrite a mortgage of this type generally only work with other mortgage professionals and rarely take applications directly from the customer.
CLS work with every kind of specialist lender in the market and match borrowers with all sorts of unique needs to their most appropriate partner.
If you’re interested in securing a mortgage loan using the retained profits in your business, we’re perfectly positioned to discuss your case. We're here to track down the mortgage you need at the best interest rate available.
Our expert advisors will walk you through what to expect and the paperwork you’ll need to supply. We’ll be happy to discuss your figures, the likely outcome, how the process works, and the operation schedule.
We know precisely what our lenders are looking for, which means we can fine-tune your application to give you the highest chances of success.
Conclusion
Being savvy with their income and dividends shouldn’t prevent those running successful businesses from applying for the mortgages they deserve. If you need to secure a mortgage on retained earnings rather than your salary or annual income, we’re here to help.
If you’re ready to talk about any mortgage, we’re ready to listen. CLS is here to ensure borrowers in every situation have the best chances of landing the deal they need to buy and own their own homes.
