Why Company Directors and New Businesses Need a Different Approach
Limited company directors and newly self-employed people are some of the most under-served borrowers in the market. Automated high-street systems are built for payslips. They usually want two years of accounts, they look at salary and dividends rather than what the company earns, and they can decline on balance-sheet items that have nothing to do with your ability to repay. This deep-dive guide explains five underwriting routes we use at Transparent Mortgage Services, each with a worked £ example.
(a) Sole Trader to Limited Company: Continuity of Trade
When a sole trader incorporates, many lenders treat the new company as a start-up. Continuity-of-trade lenders instead look through the change of legal structure. If the trade, customers and income are the same, they will combine your sole trader SA302s with the first period of company trading.
Worked example
Emma ran a bookkeeping practice as a sole trader for four years, with net profits of £52,000 and £55,000 in the last two years. She incorporated nine months ago. A standard lender asked for two years of company accounts. A continuity lender accepted her two sole trader SA302s, nine months of company management accounts and an accountant's letter confirming the same trade. Assessed on £55,000 at 4.5x, she could borrow around £247,500 immediately.
Evidence that helps: the same trading name, the accountant's confirmation of the transfer of trade, and bank statements showing the same customers paying the new company.
(b) 1 Year's Accounts and Latest-Year-Only Underwriting
Several lenders accept a single year of trading: one SA302 and Tax Year Overview for sole traders, or one year of filed company accounts for directors. Others accept two years but use only the most recent year if profits have risen, rather than averaging down.
Worked example
Tom, a director, had company profits of £40,000 in year one and £70,000 in year two. An averaging lender uses £55,000 (£247,500 at 4.5x). A latest-year lender uses £70,000 (£315,000 at 4.5x). That is £67,500 more borrowing power from the same accounts. Lenders will want to see the increase is sustainable, so current-year management figures or a strong order book help.
(c) Director's Salary + Share of Net Profit: Before vs After Corporation Tax
Directors usually take a low salary and dividends and leave profit in the company. The difference between how lenders treat this is enormous:
- Salary + dividends: £12,570 + £37,430 = £50,000. At 4.5x: about £225,000.
- Salary + share of net profit after Corporation Tax: £12,570 + £76,950 (£95,000 less 19% small-profits rate) = £89,520. At 4.5x: about £402,800.
- Salary + share of net profit before Corporation Tax: £12,570 + £95,000 = £107,570. At 4.5x: about £484,000+.
Lenders apply your percentage shareholding. A 50/50 couple would each be credited with half the profit plus their own salary, and a joint application can combine both. Some lenders cap the multiple or require a minimum shareholding (often 20% or 25%) before using profit, and your accountant may need to confirm profits are not required for working capital.
(d) Lenders That Ignore Negative Net Assets and Liabilities
Negative net assets do not necessarily mean a weak business. Inter-company loans, a director's loan account, depreciation on vans and equipment, Bounce Back Loans and start-up investment can all push a balance sheet below zero while the company trades profitably. Some lenders decline automatically on negative net assets; others ignore the balance sheet and underwrite on profit.
Worked example
A Brighton marketing agency director showed £82,000 pre-tax profit, but net assets of -£15,000 because of a £60,000 loan to a sister company. Two lenders declined. A specialist lender that disregards the balance sheet approved her on salary plus share of profit, with a short accountant's note explaining the inter-company loan.
(e) SA302-Only Lenders: No Full Accounts or Business Bank Statements
Some lenders work purely from SA302s and Tax Year Overviews downloaded from HMRC. They do not ask for full statutory company accounts, an accountant's certificate or Limited Company business bank statements. This suits directors whose salary and dividends are enough for the loan, and anyone needing a fast decision. Where a lender uses retained profit, company accounts will normally still be needed, so we weigh speed against borrowing power case by case.
Related Guides
See our self-employed, director and CIS mortgage overview, our CIS subcontractor mortgage guide, and our specialist mortgage broker service. For property purchases, see first-time buyers and remortgaging.
Choosing the Right Route for Your Circumstances
The five routes are not mutually exclusive. A director who incorporated 14 months ago, has one year of company accounts, retains most profit in the business and shows a negative balance sheet from start-up costs may need a lender that combines continuity of trade, one-year accounts, retained-profit assessment and balance-sheet flexibility. Only a handful of lenders tick every box at once, and their rates and fees vary. We model each option side by side, showing the maximum borrowing, the rate, and the documents each lender needs, so you can choose between the largest loan, the cheapest rate, or the quickest approval.
Documents Directors Should Prepare
To keep underwriting quick, gather the following before applying: your last one or two SA302s and matching Tax Year Overviews; your latest one or two years of filed company accounts, including the profit and loss account and balance sheet; current-year management accounts if profits have grown since the last filing; your accountant's name, firm and practising details, as many lenders contact them directly; three months of personal bank statements showing salary and dividends arriving; and, where relevant, evidence of the transfer of trade on incorporation. Having this ready means we can pick the lender that offers the best borrowing on your figures, rather than the one that happens to accept whatever documents are to hand. It also avoids the delays that come from underwriters requesting extra information partway through.
Frequently Asked Questions
Can I get a mortgage with one year of accounts?
Yes. Several lenders accept one full year of trading, and some will use the latest year alone if income has increased.
Will a lender use my retained profit?
Some lenders use salary plus your share of net profit, and the most generous use profit before Corporation Tax.
I recently incorporated. Do I need to wait?
Not with continuity-of-trade lenders, who can combine your sole trader history with your new company.
My company has negative net assets. Can I still borrow?
Yes. Some lenders ignore balance-sheet net assets and liabilities entirely and underwrite on profit.
What is Relevant Life cover?
A company-paid life insurance policy for directors and employees that is usually tax-efficient for both the business and the individual.
Every case we place is reviewed by a CeMAP-qualified adviser before a single credit search is run, so your file goes to the lender most likely to say yes first time. Contact Transparent Mortgage Services for a free, no-obligation review of your figures. Your home may be repossessed if you do not keep up repayments on your mortgage.
