They might be better off than some borrowers, but they face difficulties says broker
One might imagine that potentially highly salaried business owners and directors would have few difficulties securing a mortgage, but they can face challenges that even regular applicants don’t come up against, suggests broker Steve Humphrey (pictured).
Humphrey who heads up his own Portsmouth-based brokerage, The Mortgage Pod, specialises in providing advice for business-owning clients – which he identifies as a gap in the market. “It is more difficult for them to get a mortgage,” Humphreys told Mortgage Introducer. “There are lots of additional complexities when it comes to limited company income. They don't have pay slips, they're not PAYE, some directors pay themselves in dividends. Sometimes we need to look at the net profit of the company to establish the lending. So, it's not a case of, ‘Here's my salary I earn x per year.’”
Humphrey relishes the challenge of matching a client who has a complex financial situation with a solution. “There's actually a little bit more creativity that can be applied and some lenders are happy to approach these with more outside-of-the-box solutions,” he said. “Some lenders will look at net profit after corporation tax. Some will look at net profit before corporation tax, and that can really increase the options that are available to business owners - because of the extra complexities involved, it is an area in which I can really add value.”
Among the many different industries whose personnel Humphrey has advised include surveying, accountancy, and recruitment. Some businesses have been established for many years and some are in their infancy – such as one of The Mortgage Pod’s case studies, highlighted by the broker. The client was a limited company director with only one year of trading history. “Lenders prefer to see a track record and evidence of sustainability,” Humphrey said. “Therefore, when only one year’s accounts are available, options become limited, making it harder to meet lenders’ requirements. We researched and identified a smaller lender - a regional building society - that was willing to conduct a manual review and assessment of his application. Before submitting his full mortgage application, we took the time to understand the lender’s specific requirements and ensured that all necessary documents were provided promptly to support the application.” The lender said it was confident of his affordability and agreed to the mortgage.
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Are business owners’ and directors’ mortgages lucrative?
Given that more established business owners and directors are likely to earn well and therefore buy more expensive property, their cases are potentially lucrative, which Humphrey acknowledges, but he appreciates the forward thinking, positive approach of the clients he helps. “We tend to be less about the revenue side of things, we do tend to be more about the person,” he shared. “Business owners tend to be leading in their fields. They have an entrepreneurial mindset and are very interesting people, so I actually really enjoy the interactions that I have with them - there's lots of knowledge to share.”
Does Humphrey find that business-minded clients have a good understanding of mortgages, because they hopefully have a strong grasp of finance? “To be honest, no,” he said, ”especially not those who are first-time buyers. Another challenge that they will face is that they'll read so much contradictory information online that talks about pay slips and various other things which have no relevance to their circumstances.
“Limited company directors tend to leave their income in the company, thus only drawing the amount they need. In the eyes of some lenders, this means they’ve earned less whereas some lenders which look at company profit can yield greater results. Most high street lenders will look at salary plus dividends, whereas more specialist lenders will look at company profit. It would be good to see more lenders assessing net profit rather than just dividends. It’s about having the experience and specialist knowledge to know which lenders to approach. There are a couple of high street lenders, such as HSBC and Barclays, which are very good here.”
What would Humphrey’s advice be to other brokers who may see an application from a business owner or company director come across their desk? “Know your lenders and how each will assess income, as the range of max loan amounts will be £100k plus in most scenarios,” he said.
