Getting a Mortgage With Dividend Income

Navigating the mortgage market can feel like a daunting task, especially when factoring in dividend income. Understanding whether dividends count as income for mortgage applications is crucial for maximising your borrowing potential. 

Here, we will explore dividend income and its impact on mortgage applications, lenders' perspectives, and how to increase your approval chances.

Dividend Income and Mortgages: The Basics

Dividend income plays a significant role in the financial lives of many shareholders and limited company directors. As a form of income paid out to people in these roles from a company's net profit, dividend income can affect mortgage eligibility.

But how do dividends impact your chances of securing a mortgage, and what do lenders take into consideration when assessing this type of income?

What are dividends?

Dividends are a form of income distributed to shareholders or directors from a company's net profit. In essence, dividends are a portion of the company's net profit, which is the overall income a company earns after subtracting all expenses.

Although reducing over time, the tax benefits associated with dividend income make it an attractive option for company directors. Limited company directors often remunerate themselves with a combination of salary and dividend income to optimise tax liability.

What if I choose not to take dividends?

Retained earnings are the company's profit that is not distributed to shareholders as dividends. It can be used for additional investments in the company or as a safety cushion.

Some directors choose not to distribute profit as dividends. The good news is that there are some lenders who will take into account retained earnings when it comes to mortgage affordability calculations - your best chance of securing a mortgage is via a mortgage broker who is experienced with company director income streams.

Do dividends count as income for a mortgage?

Yes. Depending on the mortgage lender, dividends can be included as part of the overall income for mortgage applications. For limited company directors, dividends may be taken into account when determining total income and are thus factored into lending levels. 

However, not all mortgage lenders will take into account dividend payments as a form of income - more on this later. 

A company director's mortgage eligibility may be contingent on their stake in the company. In such cases, the lender will request to review the company's financial statements and seek information regarding the income received by the director and its form.

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How is my dividend income calculated for mortgage affordability?

Most mortgage lenders who accept dividends as declarable income will look at your share of them over a 2-3 year period and add them to your earnings over that period. They will then work out an average figure based on total income for that timeframe and multiply it by up to 4.5, although a smaller number of lenders will multiply the total by up to 5 or 6.

Read more about how mortgage affordability is calculated in our standalone guide.

Mortgage lenders' perspective on dividend income

Mortgage lenders have varying policies when it comes to dividend income. Some may accept it as part of the income used to qualify for a mortgage, while others may not.

Understanding the factors that influence lenders' acceptance of dividend income is essential in selecting the right one, boosting your borrowing and maximising your approval chances.

Lender policies regarding dividend income

While most mortgage lenders consider dividends as part of a director's income, there are exceptions. Dividends are generally treated equally to salary when determining lending levels. However, it's important to understand that not all lenders follow the same approach when it comes to dividend income.

Lenders typically seek to ascertain that the dividends declared by your limited company are sustainable over the long term, rather than being a single, non-recurring payment that does not accurately represent your monthly income.

Factors affecting dividend income acceptance

Several factors can impact a lender's acceptance of dividend income for mortgage applications. These factors include the type of mortgage, the lender's policies, the borrower's trading history, the net profit amount, and the debt-to-income ratio.

Furthermore, lenders must be assured that the dividend amounts declared are sustainable for the limited company in the long run. The length of time in business and the level of income may also have an impact on acceptance.

Which lenders will accept this income type?

Below you will find examples of mortgage lenders who accept dividends as declarable income and some of their specific policies on it:

• TSB: Will combine salary and dividends for affordability assessments but dividends must not exceed the applicant’s share of the net profits.
• Bath Building Society: Accepts salary and dividends but requires borrowers to provide three years’ accounts to evidence their income.
• NatWest: Accepts dividend income with no notable caveats but advises borrowers declaring them to carefully read through their policy notes.
• Suffolk Building Society: Accepts salary and dividend income from company directors up to the age of 75.
• Bank of Ireland: Calculates affordability based on the latest year’s salary and an average of the dividend payments over the last two years.

Speak to one of our mortgage brokers to find out which other lenders are available.

Proving dividend income for mortgage applications

To successfully include dividend income in your mortgage application, it's essential to provide the necessary documentation to prove your income. Lenders typically require a minimum history of two to three years to consider dividend income for mortgage applications.

Required documents

To demonstrate dividend income for a mortgage application, you'll need to provide your tax calculations, bank statements and company accounts. Some may also request payslips. These documents serve as evidence of your monthly income, which is crucial for lenders to assess your ability to make mortgage repayments.

It's important to ensure that the documents you provide accurately reflect your dividend income, as lenders may be hesitant to consider inconsistent or unreliable income sources.

Duration of dividend income history

A solid history of dividend income is crucial when applying for a mortgage. Many lenders rely on at least three years' worth of dividend payments when assessing the stability and reliability of a company. This is often used as a reliable indicator. However, some mortgage lenders may take into account figures from the past two years or the most recent 12 months, provided the business has been operating for a minimum of two to three years.

Meeting these requirements can significantly improve your chances of securing a mortgage based on dividend income, as lenders are more likely to view you as a reliable borrower with a consistent income source.

Combining dividend income with other income sources

Combining dividend income with other sources of income can further enhance your chances of mortgage approval. By supplementing your dividend income with a PAYE salary or other investments, you can potentially increase your borrowing amount and secure a mortgage that suits your needs.

PAYE salary and dividends

Combining your PAYE salary with dividends can be advantageous for limited company directors, as it could potentially sway the mortgage application in your favour. By presenting a more stable and diverse income stream, you may appear as a more reliable borrower to mortgage lenders.

However, it's important to note that not all lenders may consider this combination of income sources. Working with an experienced mortgage broker can help you find lenders that are willing to consider both PAYE salary and dividends for mortgage applications.

Other income sources

In addition to the PAYE salary, other income sources such as investment income, rental income, pension income, benefits and child maintenance payments may also be combined with dividend income for mortgage applications.

By presenting a diverse range of income sources, you demonstrate a strong financial profile to lenders, potentially increasing your chances of mortgage approval. It's important to work closely with a mortgage broker to ensure you present the most favourable income profile possible to mortgage lenders.

Maximising mortgage approval chances with dividend income

To maximise your borrowing amount when using dividend income, it's crucial to choose the right lender and work with an experienced broker. These strategies can help you navigate the complex mortgage market and get a mortgage based on your dividend income.

Working with a mortgage broker

Engaging the services of a mortgage broker can be highly beneficial for company directors looking to secure a mortgage. Mortgage brokers have access to a wide range of lenders and loan products, which can save you time, effort, and money.

Additionally, a specialised mortgage advisor can help to ensure that your application is as strong as possible and increase your chances of mortgage approval.

Summary

In conclusion, dividend income can play a significant role in mortgage applications for limited company directors. Understanding how dividends count as income, lenders' perspectives, and strategies to maximise approval chances is crucial for navigating the mortgage market and securing the best possible mortgage for your needs. 

By working with a mortgage broker and carefully considering the tax implications of using dividend income for mortgages, you can make an informed decision and move closer to the dream home you've been striving for.

Learn more and apply with Teito

A home is the most expensive purchase many people ever make, so it’s important to get the best deal on your mortgage. That’s why we work with the entire market and can recommend the mortgage lender most likely to accept your application using dividend income. 

It’s easy! All you need to do is compare deals, and you can manage your entire application online from the comfort of your own home - get started here.