Retained Profit Mortgage

Will all lenders accept retained profits for mortgages?

Sadly, no. Very few take salary and retained profits, but with those that do, it does work out a lot better for affordability. If you do have a large amount of retained net profits, it can be very beneficial to go down that route.

Everybody is looked at on an individual basis – and it may be best just to use salary and dividends. However, if you pay yourself £50,000 in dividends, but your net profit is only £25,000, we wouldn’t be able to use salary and dividends, as that’s unsustainable. We would have to work from the retained profit.

Essentially, if you happen to pay yourself more than is in the company, most lenders won’t accept that. It’s something that we will look at and work out on an individual basis.

Can retained profits be used alongside salary and dividends for affordability?

You can’t use all three. You can use your salary and dividends, which most lenders accept and is the most popular way to assess affordability for self-employed people. That applies to both limited company directors and sole traders.

But if you’re a limited company, with some lenders you can use retained profit and your salary. We can’t include dividends as well, because you’d be adding that in twice.

How many years of business accounts do I need to show?

For the majority of lenders using net profits, it’s a two-year average.

Do lenders look at net profit, gross profit or both?

What they use is net profit after tax. They don’t use gross profit.

How does using retained profits affect the Loan to Value I can borrow?

It doesn’t really. It’s just like a normal mortgage. It can just be more beneficial for affordability to use retained profit plus salary. If your partner is on the mortgage as well and they’re employed, we can also add their income to your overall total.

Loan to Value is all based on affordability, property value and your deposit. You need a minimum of 5%, but if you want to put down a larger deposit we can still use the income from retained profits and salary.

Are the interest rates or fees higher when using retained profit compared to standard self-employed mortgages?

No, not at all. The only thing that could have an effect is the Loan to Value. If you just had a 5% deposit, your interest rate will be higher on a 95% product than if you put down a 40% deposit and had a 60% product. Overall, you’ll get the standard rates everybody else has.

How can a mortgage broker help here? Have you got anything you’d like to add?

Everybody’s looked at on an individual basis and sometimes this can work out to be very beneficial. I’ve worked with lots of clients who have their own limited company and were pleasantly surprised to find out what they can afford by doing it this way.

Often they’ve been able to get the dream home. It’s all about affordability, based on the last two years’ accounts. So as long as you’ve got the retained profit there, we can use it.

Key Takeaways:

• Retained profits can boost mortgage affordability for limited company directors, although it is not a specific product.
• Lenders typically use an average of the last two years’ net profits after tax (not gross profit), plus the director’s salary.
• You cannot use salary, dividends, and retained profits; if using retained profits, it must be paired with salary, but dividends are excluded to prevent double-counting.
• Not all lenders accept retained profits, but those that do can significantly improve the amount you can borrow.
• Interest rates and fees are generally the same as standard self-employed mortgages; the only factor affecting the rate is the Loan to Value (LTV).
  
  

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.