Retained Profit Mortgage
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Retained Profit Mortgage
Charlie Huxley talks to us about the ins and outs of using retained profits for a mortgage.
What is a retained profit mortgage, and how does it work? Is this an actual product?
It’s not a product – a retained profit mortgage is where lenders use the profits from your company towards your income, and not just what you pay yourself. Instead of relying on salary and dividends, they look at your business accounts and lend based on the strength of the company, not just your personal income.Am I eligible if I keep profits in my business instead of drawing them as income?
Yes, you can still be eligible even if you keep profits in the business. Many lenders will use retained profits plus your salary to work out what you can afford. That’s ideal for directors who take a really low salary and dividends, but run a strong and profitable company.How do lenders assess retained profits when calculating affordability?
Lenders do this by looking at your company accounts, checking how much profit is left after expenses and tax, and confirming it’s suitable over the last one, two, or even three years. They’ll match that profit to your share of the business and use it as part of your income for affordability. As long as the numbers are stable and the business is financially healthy, you’ll be good to go.Do I need an accountant’s certificate to prove retained profits?
No, you don’t always need an accountant’s certificate, but many lenders do ask for one. It’s a quick way to verify your company’s income, turnover, and profit,s and also your share of the business, and make sure the figures match your accounts. Some lenders will accept full accounts and won’t need an accountant’s certificate, but having this often speeds things up.Will all lenders accept retained profits for mortgages?
No, not all lenders accept retained profits. Some will only use your salary and dividends, but a growing number of specialists and some mainstream lenders will consider it, especially if you’re a director or a large shareholder. From a broker’s point of view, it’s all about choosing the right lender that suits what you’re looking to do. The criteria vary massively across each lender, so it can save a lot of time to find the right product first time round.Can retained profits be used alongside salary and dividends for affordability?
Sometimes, but most lenders will either use your salary and dividends or your salary and the percentage of net profit. We rarely look at both.SPEAK TO AN EXPERT
We won’t only guide clients through the mortgage process but offer long lasting professional relationships for any future needs or advise.
How many years of business accounts do I need to show?
Having access to two years’ accounts will open up more lenders. However, if you don’t have that, a few niche lenders will allow you to apply for a mortgage with retained profits based on just one year’s accounts.Do lenders look at net profit, gross profit, or both?
Lenders will always look at the net profit. Some consider the net profit after tax, while one specific lender can actually consider net profit before tax. It’s quite a specialist bank. That can typically provide a boost to your borrowing, subject to meeting all their other criteria, but it’s the net profit that most lenders will accept.How does using retained profits affect the loan-to-value I can borrow?
If you’re using a lender that can assess affordability based on your retained profits, there’s no reason why you couldn’t get a 95% mortgage.Are the interest rates or fees higher for retained profit mortgages compared to standard self-employed mortgages?
The rates shouldn’t be any different because you’re self-employed and using the net profit of the business. Rates are generally driven by the lender and the loan-to-value you’re applying for, rather than your employment structure. However, this does change depending on whether you’ve got one or two years’ trading accounts. Having fewer records does reduce the pool of banks.How can a mortgage broker help here? Have you got anything else to add?
Using your retained profits can be beneficial, but it’s complicated. You need a broker with experience in working with self-employed clients to make sure that you get the most suitable deal. You don’t want to be put with the wrong lender for your situation and not get full access to your borrowing capacity.Key Takeaways:
- A “retained profit mortgage” is not a specific product, but a lending method where financial institutions use the profits kept in your company, in addition to or instead of just your personal salary and dividends, to calculate your income for affordability.
- This approach is ideal for company directors or large shareholders who take a low salary and dividends but operate a strong and profitable business, allowing them to potentially qualify for a mortgage.
- Lenders primarily look at the business’s net profit (some may consider it before tax) after expenses and tax, confirming the profit’s suitability over one, two, or three years, and matching that profit to your share of the business.
- Not all lenders accept retained profits; criteria vary significantly, but a growing number of specialists and some mainstream lenders will consider it. Having two years of business accounts will open up more options, though a few niche lenders may accept only one year.
- Using retained profits can boost your borrowing capacity, potentially allowing for a 95% loan-to-value mortgage with rates comparable to standard self-employed mortgages. A broker with experience in self-employed clients is recommended to navigate the complexities and find the most suitable deal.