Retained Profit Mortgage

What is a retained profit mortgage and how does it work? Is this a product?

It’s not so much a specific product as how we could look at your income if you’re a director of a limited company, or you have shares in one. Essentially, one way of looking at your income is to use your profit.

It works in the same way as any other mortgage. Lenders don’t have a retained profit mortgage necessarily. It’s just that some lenders’ criteria allow us to look at profit instead of the default approach of salary and dividends.

Limited company owners tend to take a salary, usually a low one that’s under the tax threshold. Then they take dividends on top, and most lenders accept those together. But these other lenders look at profit instead – and this can work out really well, depending on how you run your business.

Am I eligible if I keep profits in my business instead of drawing them as income?

Yes – this is the beauty of this way of looking at your income. Let’s say you own a limited company and you pay yourself £50,000 a year as salary and dividends together. That’s just below the higher rate tax threshold.

But your company makes £100,000 profit – so you’ve only taken 50% of that as salary and dividends. Most lenders are just going to look at the £50,000 and ignore the extra £50,000 left in the business.

But if we go to a lender that looks at your salary plus profit, your income will be accepted as £100,000. You can then borrow twice as much as with a standard lender. It’s game-changing for some people.

If you take all the profit out of your business each month or each year, this isn’t really going to make much difference to you. The people that really benefit are those that take out what they need, but leave some money in the business.

Anyone that owns a limited company is eligible to go to a lender that looks at income this way. But the ones that see the most benefit are those that keep money in the business.

How do lenders assess retained profits when calculating affordability?

In exactly the same way as any other income. They all have an affordability calculator. Normally you pay yourself a salary, which could be around £12,000 to stay under the tax threshold. Then we’ll work out your share of the net profit.

If you own half a business, you’re entitled to half the profits. If you own 100%, that’s easy. Sometimes we see a couple applying for a mortgage together and they own 50% of the business each, so we use 50% of the profits each.

Most of the time we’re going to average the retained profit from the past two years and add that onto your salaries. That’s the income used to calculate your affordability. This approach can often give you a much bigger mortgage than if you just use dividends.

Do I need an accountant’s certificate to prove retained profits?

Some lenders use an accountant’s certificate instead of accounts, while other lenders just want accounts. As a limited company director getting a mortgage, you do need to have an accountant.

I’ve had the odd case in the past where people have done their own accounts, and technically you can. You’re not legally obliged to pay an accountant to do it, but 99% of people have an accountant. You don’t have to have an accountant’s reference at the outset. Normally we would just use your accounts.

Will all lenders accept retained profits for mortgages?

No, it’s only a select few. There’s probably a handful I could think of off the top of my head. If you want to know who they are, just get in touch.

There are a couple of high street lenders and we may go to some others. The high street lenders are the first port of call, and we go from there. But most lenders will default to salary and dividends – not net profit.

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

Not both. Alongside salary, yes. Lenders take salary and profit because your salary is a business cost. It’s tax-deductible.

Your profit is calculated after your salary is accounted for. But you pay your dividends from your profit, so you can’t use dividends and profit – they’re the same thing.