Will taking dividends affect my mortgage lending capability?

Company directors frequently pay themselves through a combination of wages and dividend payments or dividend payments alone in some cases. While this may provide tax benefits, it frequently creates confusion when applying for a mortgage. In this short blog, well discuss whether dividends qualify as income for mortgage purposes. We will then discuss how you might be able to obtain a mortgage based on dividends instead of a regular traditional income model.

Do dividends count towards a mortgage?

Dividends can count as income towards a mortgage with certain lenders. Because not all lenders will allow you to use dividends for a mortgage, its worthwhile to engage with a specialist advisor who is familiar with the market, lenders, and application procedure for limited company directors. It is often beneficial for directors to pay themselves a combination of PAYE salary and dividends, as this combination of income may help influence the mortgage application in their favour.

However, many lenders will want to ensure that the dividends you declare are sustainable for your limited company over the long term, rather than a one-off payment that is not a reliable indicator of monthly income. Due to the diverse criteria that UK mortgage lenders use to determine whether applicants must show their income, its essential to seek assistance from an expert. With a quick call, our advisors can provide you with free initial advice.

Also see: How to calculate Dividend tax?

Getting a mortgage when paid in dividends

Directors of companies must prove to a mortgage lender that they can afford the monthly payments. They will require documentation demonstrating that you have sufficient monthly income to avoid defaulting on payments.

This is simple for the majority of employees, as they can give monthly payslips. This is not as straightforward for many company directors due to their payment structures. However, this does not mean it is impossible. By using the services of an specialised mortgage advisor who is experienced in dealing with dividend mortgage applications, you may be well on your way to getting an in-principle decision.

Also See: Transferring your Buy to Let to a Limited Company - The Advantages

How can I get a mortgage based on dividends?

There are several options for obtaining a mortgage if you are only paid in dividends. How you might be able to obtain a mortgage using this method is as follows:

• Lenders may treat dividend income similarly to monthly wage; however, this may depend on the frequency of dividend payments.
• Lenders will look for a regular dividend that can be relied upon to generate a stable income, similar to a wage.
• Lenders will also want you to submit a letter from your accountant to ensure the applicants regularity, history, and volume of payments.
• A minimum of six months history is generally required.
• Individual bank statements showing the dividend payment are frequently requested.

If you are a limited company director who is paid through a combination of dividends, wages, bonuses, directors loans, and other sources of income, the lender will want to know the following:

• Six months of personal bank statements reflecting a regular income amount to reassure a lender.
• Combine this with a detailed explanation from the applicant, supported by recent years; Tax Calculation is sufficient for the majority of lenders.
• Regular payments can be computed at 100%, whereas occasional bonuses can be calculated at 50% for income multiple purposes.
• If bonuses are regularly having the same amount, e.g. £5,000 per quarter, a lender is considerably more likely to accept the entire bonus as income.

If you would like to speak with a specialist adviser who has expertise in helping company directors obtain mortgages based on dividend income, please contact dns right now on 3330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Also See: Complete guide on Directors Loans Accounts

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.