Mortgages using retained profits: a guide for Ltd Co. directors

If you run a limited company, you (probably) pay yourself a modest salary topped up with dividends. Great for a tax strategy. But for getting a mortgage? You probably don’t need us to tell you the problems that being ‘tax efficient’ causes.

Here’s the thing. You run a profitable, thriving business. You only extract the money you need to live on from that business. Yet when you apply for a mortgage, the wheels fall off. A traditional lender just can’t see what you can truly afford to borrow. Instead, they look at your declared income, then offer you far less than you expected.

There is a better way. And if you’ve been leaving money inside your company rather than drawing it all out, it could be significantly better.

This guide explains everything you need to know about getting a mortgage using retained profits. We cover:

• how it works;
• who qualifies;
• which lenders consider them;
• and why a specialist broker is the only realistic route to making it work for you.

Retained profits: what they are and why they matter for your mortgage

Retained profits (retained earnings) are the net profits your limited company has made but not yet distributed to you as salary or dividends. Instead of taking that money out, many directors leave it inside the business.

Leaving money in the business is a legitimate strategy that means the director(s) don’t pay income tax on it. Instead, it sits in the company’s reserves, available to reinvest, cover future costs, or simply build up as a financial cushion. This is an entirely sensible (and legal) tax-planning strategy. But it creates a frustrating problem when you apply for a mortgage.

Most high-street lenders assess your affordability solely on your personal income. So all they’ll use to work out what you can afford to borrow is the salary and dividends you’ve drawn from your company.

Any money you’ve left in the business is invisible to them. So, yes: you’ve been prudent and kept a significant proportion of your profits inside your company. But a standard lender will systematically undervalue your earning power on that basis.

Retained profit mortgages solve this. A select group of lenders are willing to look beyond your personal drawings. They use manual underwriting to include your share of the company’s net profit when calculating how much you can borrow. The result, for many directors, is a dramatic increase in borrowing capacity.

Is a retained profit mortgage a specific product?

Getting a mortgage using retained profits relies on specialist underwriting rather than it being a specific ‘product’. This is an important distinction. You won’t find a lender advertising a special “retained profit mortgage” with its own rates and conditions. If you walk into a branch and say you’re a company director, they’ll treat you as straight-up self-employed.

Rather, a retained profit mortgage describes how certain lenders calculate your income when assessing affordability.

Most traditional lenders default to salary + dividends. And it’s this method that often leads to derogatory mortgage offers or outright rejection.

A smaller number of lenders—including some high street names and several specialist lenders—are willing to use salary + net profit instead. It’s this underwriting method that will make the most of your income.

A quick note: your salary is a business cost (deducted before you work out your profit). Therefore, you can’t double-count dividends and profit together. But specialist underwriters will use both salary and net profit. For directors who retain significant sums in their business, this unlocks considerably higher borrowing.

Who benefits most from this approach?

Directors who stand to gain most from retained profit underwriting are those who:

• Pay themselves a tax-efficient salary (typically around the National Insurance threshold) and draw down the rest of their income as dividends
• Deliberately leave a significant portion of their profits within the company rather than withdraw all monies each year
• Have a company with consistent or growing profitability over the past two years

If you draw all of your net profit as dividends every year, the difference in your mortgage affordability will be minimal. That’s because the difference between a salary + dividends approach and a salary + net profit approach would be negligible. In real terms, the two figures are roughly the same.

The real benefit comes precisely from not drawing everything out.

How do lenders calculate affordability using retained profits?

The lending criteria and actual process vary slightly between amenable lenders. But the most common approach would look something like this:

• Step 1: Take your director’s salary (your PAYE income from the company).
• Step 2: Add your share of the company’s net profit for the year. The lender will base this amount on your percentage shareholding. If you own 100% of the company, you get the benefit of the full net profit. If you own 50%, it’s half.
• Step 3: Most will average those figures from the past two years, but a small number of our sympathetic lenders will consider one.
• Step 4: Apply the standard income multiplier. This is typically 4.5 to 5.5 times annual income, depending on factors such as deposit, credit rating, disposable income, etc. The total will give them the maximum amount they’ll lend you for a mortgage.

Lenders that assess affordability using net profit will base their calculations on profit after business expenses, corporation tax, and other deductions.

A handful use operating profit net profit before corporation tax). But a specialist broker would only approach those lenders in specific circumstances where it produces a better outcome.

Will lenders use retained profits alongside dividends?

No. You can’t use retained profits alongside dividends. Since dividends are paid from post-tax profit, using both would double-count the same money. You use ‘salary + profit’ or ‘salary + dividends’, not both simultaneously.

What documents will you need?

At a minimum, expect to provide:

• 1 to 2 years of filed company accounts, signed off by a qualified accountant.
• SA302 forms and Tax Year Overviews from HMRC, confirming your personal tax position for the relevant years.
• Personal and business bank statements, typically three to six months of each, depending on the lender.
• Proof of shareholding, particularly if you share ownership of the company with multiple directors.

Some lenders may also request an accountant’s certificate. This document is a formal letter from your accountant confirming and explaining your retained earnings. Given that several of the most flexible retained profit lenders do ask for this, it’s worth briefing your accountant and ensuring they’re available to provide one.

Other lenders, though, are happy to rely solely on the filed accounts. Check with your broker before submitting your application.

Will using retained profits impact my interest rate or deposit requirement?

Re: rates: no. Lenders who accept retained profits use the same published rates as for any other mortgage. They won’t penalise you with a higher interest rate simply because they assess your income differently. You’ll have access to the lender’s core mortgage range.

Re: deposit/loan-to-value (LTV) : also, no. The income assessment method does not restrict your deposit options. Lenders who assess income based on retained profits can lend at the same LTV ratios as for other applicants. In some cases, this can reach 95% LTV (5% deposit). However, a larger deposit will give you access to more competitive interest rates.

The one practical consideration is that the pool of lenders willing to accept retained profits is smaller than the full mortgage market. As such, you may not always have access to the very lowest market ‘headline’ rate available at the time of application

Getting you the most competitive rate for your situation is where a specialist broker earns their fee. Using their experience, they identify which lenders within the retained profit pool offer the best:

• combination of rate,
• criteria flexibility, and
• service speed for your situation.

How many lenders offer underwriting based on retained profits?

At time of writing, it’s only a handful of lenders willing to incorporate retained profits into their affordability calculations. The list includes a mix of specialist underwriting teams at high-street and specialist lenders.

The lending criteria differ slightly from lender to lender. Some want to see two years’ worth of accounts; fewer still accept only the most recent year. Some will use the average profit over two years, whilst others use the most favourable year. Some use net profit; a couple will use gross (operating profits before corporation tax).

Very few of these criteria turn up in a Google search. They change as lenders adjust their risk attitudes and as the mortgage market fluctuates. These lenders also actively want applications submitted through a specialist broker who can ‘vet’ them before they reach an underwriter’s desk.

Knowing which lender to approach for your specific circumstances is exactly what a specialist broker brings to the table. Moreover, they know how to present your application in such a way that your mortgage affordability is immediately apparent. Without this interpretation, it’s unlikely that your application will garner the success you hope for.

Why branches, call centres and comparison sites will do you no favours

Approaching a bank branch, call centre or using a generic comparison site is a surefire way to court rejection. Lenders train their in-branch advisers and call centre agents for straightforward cases.

Even if they’re familiar with the concept of retained profit mortgages, their systems won’t allow them to make the most of the money you leave within the business. Plus, lenders are constrained to using the mortgages within their business.

Comparison sites can only call on the panel of lenders their website represents. There’s no guarantee their mortgages can leverage your retained profit. There’s every chance of them rejecting your application.

And here’s the thing. Every rejection leaves a hard search on your credit record. A series of rejections from lenders (who were never going to approve you, anyway) makes the next application harder. A specialist broker will submit your application to the right lender, first time.

We’ve spent over 20 years building relationships with lenders who understand how limited company directors actually manage their finances. We know which lenders:

• accept retained profits,
• require an accountant’s certificate,
• will average two years’ income, and
• can use only one/the most recent year.

More importantly, we know how to package your application to give it the best possible chance of approval.

If your company is profitable and you’ve been sensible about what you draw from it, you almost certainly have more borrowing power than a traditional lender would tell you. Let us show you what that looks like.

Start your mortgage using retained profits journey here, today.