As a business owner operating through a Limited Company, you may already be aware of how important your salary and dividends are when it comes to mortgage affordability. However, there’s a key piece of information that many business owners aren’t aware of, and it could make a significant difference in how much you can borrow.
Did you know that there’s a small group of lenders who will also consider the retained profit in your business when assessing your mortgage application? This is a valuable piece of the puzzle that could help boost your mortgage affordability, especially if you’re running a profitable business but paying yourself a modest salary.
What is Retained Profit and How Does It Help Mortgage Affordability?
Retained profit refers to the portion of your business’s profit that is kept in the company rather than being paid out as dividends or salary. It’s essentially the money that stays in your business and contributes to its overall financial health.
For many self-employed individuals, particularly those running Limited Companies, lenders typically focus on your salary and dividends when calculating how much you can afford to borrow. However, the good news is that some lenders will take into account your retained profit alongside your salary as part of your affordability assessment, meaning in these scenarios the dividend payment becomes unnecessary.
To simplify this, lenders will either use;
Salary + Dividends OR Salary + Retained Profits.
Why This is Good News for Business Owners Looking To Increase Mortgage Affordability?
If your business is highly profitable but you choose to pay yourself a small salary (which is a common tax-efficient strategy), you might think that paying yourself a large dividend is the only way to maximise your mortgage affordability. But that’s not necessarily the case.
By including the retained profit in your affordability calculations, you may find that you can borrow more without the need to take a large dividend. This opens up opportunities for those who run profitable businesses but don’t necessarily need or want to pay themselves a huge dividend each year.
The Benefits of Using Retained Profit in Your Affordability Assessment.
- Maximise Borrowing Potential: If your business is doing well but you’re keeping a low salary or dividends, lenders who assess retained profits could help you unlock more borrowing power. This means that even if you’re not drawing a large income, you may still be able to access a mortgage based on the success of your business.
- Tax Efficiency: Many business owners opt to take a low salary to keep their personal tax burden low, while paying themselves through dividends. Using retained profit in your affordability assessment means you don’t have to worry about paying yourself a larger dividend just to meet mortgage criteria, which can help you maintain your tax efficiency.
- Preserve Your Business’s Financial Health: Keeping retained profit in the business helps with cash flow and reinvestment. By using retained profits in your mortgage application, you can maintain this strategy without needing to disrupt the financial stability of your company.
Which Lenders Will Consider Retained Profit?
While more lenders are starting to consider retained profit in their affordability assessments, the policies surrounding this can change frequently. As a result, naming specific lenders can quickly become outdated. Right now, the pool of lenders that assess retained profit is smaller, so it’s essential to ensure that you meet all other policy requirements with these lenders.
Working with a knowledgeable mortgage broker is key to navigating this smaller group and ensuring your application meets all the necessary criteria for the best possible outcome. It’s also crucial to consider these factors when meeting with your accountant to prepare for your year-end accounts.
For more guidance on preparing for a mortgage application as a self-employed individual, check out our separate blog – simply head back to the blog homepage, and you’ll find it there.
What Does This Mean for You?
If you’re a business owner who has been paying yourself a modest salary but maintaining a healthy level of retained profit, you may have more options than you think. Instead of relying solely on your salary and dividends, you could leverage the profitability of your business to increase your chances of securing a mortgage and maximise your borrowing potential.
This could also save you from the need to take out large dividends just to meet affordability requirements, allowing you to keep more money in your business for reinvestment or growth.
Conclusion: Take Advantage of Retained Profit to Boost Your Mortgage Options.
If you’re running a successful Limited Company and looking to buy a property, it’s worth exploring how your retained profits can play a role in your mortgage application. By considering more than just your salary and dividends, a select group of lenders can offer you greater flexibility in securing the mortgage you need.
So, before you start thinking that you need to pay yourself a large dividend to increase your mortgage affordability, remember that retained profits could be the key to unlocking more borrowing power without the need for extra withdrawals.
If you’re unsure about how retained profit could help you, or if you’d like advice on how to maximise your mortgage options as a Limited Company owner, get in touch. I’d be happy to guide you through the process and help you find the right mortgage deal for your business.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Emily Mays / Director