Using Retained Profits for a Mortgage
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Marcus Robinson
Managing Director
Knows About: Using Retained Profits for a Mortgage
Using Retained Profits for a Mortgage
For limited company directors, calculating mortgage affordability can be complex. While some lenders look purely at the salary and dividends you have physically drawn, there is another way.
In this article, Marcus Robinson explains how retained profits within your business can be used to increase your borrowing potential, which lenders are more likely to consider this approach and the documentation you’ll need to prepare for a successful mortgage application.
What exactly are retained profits, and why do they matter for a mortgage application?
When a company makes a profit, its directors can draw income from the business, typically through a combination of salary and dividends. However, they don’t always withdraw the full amount available to them. The money left in the business is known as retained profits.
While some lenders only look at the salary and dividends you have actually drawn, some realise you could have taken more and will look at the net profit of the business. This often allows limited company directors to borrow more than they could based on drawn income alone.
Why do most high street lenders ignore retained profits when calculating how much a director can borrow?
The problem for many lenders is that retained profits are not officially your personal income yet; they are still housed within the business.
Lenders are sometimes concerned that if something went wrong with the business, you might not be able to take that money out in the future, potentially leaving you short on income to cover the mortgage.
How do certain lenders factor retained profits into their affordability calculations?
There are some lenders who will look at the profits of the business and what you have drawn yourself. They can then factor any profits you were eligible to draw into your income calculation.
While they often look at the last two years of accounts, one or two lenders may consider just the latest year.
Is there a difference between using net profit and retained profit for a mortgage?
The main difference is that net profit is the annual profit from the business for a specific year, whereas retained profit is what has built up over time. When lenders say they look at retained profits, they are usually looking at the profit earned in that last year.
Many will use an average over a number of years, but they can still look at the profits for a single year as part of that average.
How many years of retained profits do lenders typically want to see before they’ll consider them?
Requirements vary by lender. Some want to see three years of accounts, some two years, and some can even work on just one year. While there are options for those trading for only a year, a large number of lenders prefer to see an average over two years.
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Can retained profits help if your salary and dividends alone aren’t enough to borrow what you need?
Yes, this is the perfect time to use lenders who work off net profit. Instead of just using your dividends, they will add your share of the net profit to your salary, which can significantly boost your borrowing capacity.
What happens if your retained profits have been going up and down year on year – does that cause problems?
Fluctuations aren’t necessarily a problem, but it depends on the severity. If profits have been declining over several years, a lender might only take the latest, lower year rather than an average.
If profits are increasing, they will likely still use an average rather than just the most recent year.
Do you actually have to draw the retained profits out of the company for lenders to count them?
No. This is ideal for directors who don’t need to draw all their profits and want to avoid the associated tax. You can borrow against the profits while they remain within the business.
What should you ask your accountant to prepare if you want to use retained profits in your mortgage application?
You will need the standard documents for a self-employed application, including personal tax calculations and tax year overviews. Additionally, you must provide full company accounts, as these show the actual profit figures.
Depending on the lender, you may need accounts covering one, two, or three years.
Is it worth leaving more profit in the company specifically to strengthen a future mortgage application?
This is a personal choice based on your goals. If drawing more income would push you into a higher tax threshold and you don’t need the cash, it makes sense to leave it in the business.
We can discuss your specific situation and liaise with your accountant to find a tax-efficient way to show the income you need for your mortgage.
Summary:
Using retained profits is a powerful way for limited company directors to access higher mortgage borrowing without increasing their personal tax liability. By choosing lenders who understand business structures, you can use the net profit of your company as a primary income source.
Key Points:
- Retained profits are funds left in the business after dividends and salary have been paid.
- Lenders using this method typically look at salary plus your share of net profit.
- You do not need to physically draw the money to have it counted for affordability.
- Preparation is key: you will need full company accounts and tax overviews.
A fee may be payable if we progress your application. Our average fee is around £200, and the maximum you may pay is £595 for bridging loans or adverse credit mortgages.
Mortgage Style Ltd, trading as Mortgage Style, is an appointed representative of HLPartnership Limited, which is authorised and regulated by the Financial Conduct Authority.
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