Profit or Dividends: How it Affects Your Mortgage

Deciding how to take income from your business is often driven by tax planning. It’s important to remember that this decision can also play a key role when applying for a mortgage. When it comes to borrowing, how your income appears on paper can directly influence how much you may be able to borrow.

SHOULD I TAKE DIVIDENDS OR LEAVE MONEY IN THE COMPANY?

This question often arises when directors start thinking about buying a home or reviewing their mortgage.

Most high street lenders assess limited company directors using a salary plus dividends approach. This method only looks at the income you physically take out of the business. This includes the salary you pay yourself through PAYE and any dividends that have been declared. While this approach is straightforward, it may not always reflect the true strength of your business, particularly if you regularly retain profits to support future growth or stability.

Some specialist lenders take a broader view. Instead of focusing solely on salary and dividends, they may assess salary plus profit. This can include your share of net profits after corporation tax or retained profits left within the company. For directors who choose to keep money in the business rather than draw it out as dividends, this approach can sometimes result in a higher borrowing potential.

When weighing up dividends versus retained profits, it’s important to consider both the financial and mortgage implications. Retaining profits may make sense from a business or tax perspective, but it could limit how some lenders view your income. On the other hand, increasing dividends to support a mortgage application may have consequences that need careful thought.

There’s no one-size-fits-all answer. The right approach depends on how your business is structured, your long-term financial goals and, crucially, which lender you apply to. Different lenders have different criteria, and choosing the right one can make a significant difference.

If you’re thinking about a mortgage, tailored advice is key. Get in touch today to explore your options and ensure your income is presented in the most effective way.

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