What your retained profit could mean more borrowing.

The conversation I keep having

You have built a business that supports your family comfortably. Your accountant has done a tidy job of keeping your tax bill sensible. Then you apply for a mortgage, and a lender tells you that you earn about a third of what you know you earn.

Nothing has gone wrong. You have simply met a lender whose calculator only counts two of the numbers on your accounts. It is not being difficult. It genuinely cannot see the rest.

That is not a reflection of your financial position. It is a reflection of how that particular lender does sums. Another lender, looking at the same accounts on the same morning, can reach a very different figure.

Knowing which is which before you apply is the entire job.

Why the high street often underestimates directors

Plenty of lenders assess a limited company director on salary plus declared dividends. It is simple to check and it suits the way an employed applicant is assessed, which is what their systems were built for.

It works perfectly well if you draw everything you earn each year.

It works badly if you do what a lot of directors do, which is pay yourself a modest salary, declare only the dividends you actually need, and leave the rest in the business. Perhaps you are funding growth. Perhaps you are holding a cash buffer after a lean year. Perhaps your accountant has quite sensibly suggested you keep your personal tax bill down.

To that lender, profit sitting in your company does not exist. Your accounts can look healthy while your mortgage offer looks thin.

The irony is that the more disciplined you have been about leaving money in the business, the worse you can look on paper. Run it badly, draw the lot, and the same lender nods along happily.

The three ways lenders look at director income

Broadly, there are three approaches in the market. Which ones are open to you depends on your accounts, your trading history and your shareholding.

Salary plus dividends. The common approach. Your PAYE salary is added to the dividends declared in the tax year. Simple, and it can undersell directors who keep dividends low.

Salary plus your share of net profit. Here a lender looks at your salary alongside your share of the company's net profit, whether or not you drew that profit as a dividend. That gives a fuller picture of what the business earns and what you could draw if you chose to.

Salary plus net profit before corporation tax. A smaller group go a step further again and work from your share of profit before corporation tax is taken off. It is the more generous of the three, and it can make a real difference to what you can borrow where the business holds a healthy profit.

Each lender sets its own rules on which it uses, how many years it averages, and how it treats a year that dipped. Some will average two years. Some take the latest year. Some take the lower of the two. A business with a strong recent year and a quieter one behind it can be assessed very differently depending on which door you knock on.

There is more detail on all three in my article on limited company director mortgages.

What lenders typically ask for

Directors live or die on paperwork being ready. Having this to hand turns a slow application into a straightforward one:

• Two years of finalised company accounts, though some lenders will work from one where the business is established
• Two years of SA302 tax calculations and tax year overviews from HMRC
• Three to six months of personal and business bank statements
• Proof of your shareholding
• In some cases, a reference or a short letter from your accountant

If your accounts are prepared by a qualified accountant and show a clear, steady trading history, you may be in a stronger position than you think. The work is matching your circumstances to a lender whose criteria already fit, rather than bending your finances to suit a lender that was never set up for you.

What about profit you have left in the company?

This comes up constantly. You have retained profit sitting in the business that you have not drawn, and you want to know whether it counts.

Honestly, it depends on the lender. Some will take retained profit into account, particularly where the business has a solid track record and the figures are consistent across two years of accounts. Others will not look at it at all.

Even where it is not counted directly, retained profit generally reassures a lender about the health of the business. It shows you are not drawing out every penny and that the company holds reserves, which matters when an underwriter is weighing up risk.

Situations I see regularly

You have two years of accounts but the first was quiet. How a lender treats that varies enormously. Averaging two years and taking the latest year give very different answers.

You incorporated recently after years as a sole trader. The business is the same, but on paper the trading history looks shorter. Some lenders will consider your history as a sole trader alongside the company. It is worth checking before you apply rather than afterwards.

You draw income from more than one company. Often workable where you hold a meaningful share in each, though the structure matters and not every lender will combine them.

Your income is part PAYE, part dividend, part something else. Common among directors who also consult, hold a salaried role, or own property. It needs unpicking properly rather than squeezing into a form.

You are buying something large or unusual. Bigger loans and complex structures can call for a different sort of lender altogether. There is more on that on my high net worth and complex income page.

You trade as a sole trader rather than through a company. Different rules again, which I have set out on the self-employed mortgages page.

Where directors get caught out

Going straight to your own bank. It might well be the right answer. The trouble is you will not know, because they will only ever tell you what they can do, never what the wider market can. If they say no, you have a search on your credit file and no more information than you started with.

Applying in the gap between year end and finalised accounts. Timing an application around when your accounts are filed can change which lenders are open to you.

Restructuring your pay without asking first. Directors sometimes raise their salary or declare extra dividends to "look better", usually a month before applying. Lenders generally look at a track record, not a sudden change, and your accountant may have good reasons for the way things are set up.

Leaving the director's loan account overdrawn. It is one of the first things an underwriter looks at, and "I'll sort that out later" is not the answer they are hoping for.

Assuming a decline is the end of it. A decline from one lender tells you about that lender's criteria. It does not tell you what the rest of the market would do with the same figures.

Will applying affect my tax position?

Possibly, which is exactly why it is worth a conversation with your accountant before anything changes.

Drawing more dividends to support a mortgage application has a tax consequence. Changing your salary has one too. I am not a tax adviser and I will not pretend otherwise, but I am happy to speak to your accountant directly so the two sides of the decision are made together rather than separately. That conversation is usually fifteen minutes and saves a lot of unpicking later.

How it works with me

1. A short call. How you pay yourself, how long you have traded, what you are trying to buy or refinance.

2. I look at the figures properly. Not a quick quote, but a view of which assessment approaches your accounts actually support.

3. I tell you where you stand, including if the answer is "wait three months and file your accounts first".

4. If it stacks up, we apply, with the paperwork lined up in advance.

5. I stay with it to completion, and talk to your accountant and solicitor where that helps.

Not sure you are ready yet? The Mortgage Ready questionnaire gives you a score out of 100 and the two things worth sorting first. It takes about three minutes and leaves no mark on your credit file.

One more thing worth knowing

If you run a limited company, there are ways of arranging life cover through the business rather than out of your own pocket. It is a separate subject to your mortgage, but it comes up often enough with directors that it is worth a look at my relevant life plans page while you are here.