Interest only mortgages (day rates) and director's loans

[Jemz0r]

Evening all.

I have stumbled across these forums on many an occasion, although for some bizarre reason have never signed up in my last 4 years of contracting. So... on that note, I thought I would say a quick hello and start with a few mortgage related questions

Firstly I have read the various articles in relation to lender borrowing and the advice offered by the board and the members in respect of securing a suitable mortgage for contractors - so thank you! My financial situation is such that the maximum burrowing capacity is obtained through the day rate assessment criteria.

1.) My first question is have any contractors here managed to secure an interest only product based on this criteria? If so, where from?

There are various articles across these forums and through google in relation to interest only products, but these date back to 2013 - when the interest only market shrank significantly. I am led to believe lenders have eased off, stipulating requirements for a payment vehicle to be setup to ensure the capital isn't left hanging after 30 years.

2.) My second question is whether anyone has been successful in using cash reserves in the company account to justify this payment vehicle? It is not stated with some lenders as an example, although I do wonder whether lenders adopting the day rate criteria will see this as acceptable.

3.) And thirdly, have any borrowers of any mortgage products here gone down the route of building up their deposit contributions through a director's loan from their Ltd company? I am slowly getting to grips with this as an option but would like to hear about individual's views and any particular trips and falls. I am aware for instance that a 25% corporation tax will need to be paid, only for it to be repaid back the following year.

Many thanks and looking forward to doing some more reading!

[northernladuk]

Not heard of anyone doing that on this forum so I'd say you need to go speak to one of the specialists. The number of contractor products is increasing constantly but don't think it's to the point we have the choice a normal application needs. Try John Yerou at Freelancer Financials. He's always posting about new lenders coming to market on LinkedIn.

From what I've seen the criteria is against contract rate. If you don't meet it then that would be that. It's your ability to earn for the duration of the mortgage. You could withdraw the cash reserves next day and you are skint so a risk to the lender. I am sure it will help but still need to meet some other criteria. It's different per lender so I'd say speak to the pros again.

Many lenders now won't, and for obvious reasons, use loans as deposit. It's a new debt that can affect the affordability criteria. IMO using directors loans for this needs a lot of caution. Get it wrong and the tax hit will sting. That aside you've got the hurdle of using loans as a deposit first before worrying about the DL.

Something sounds very unusual here. Cash in the business, interest only and DL for deposit? What's the real story here then?

[Jemz0r]

There is no other story. I am simply trying to maximize my deposit through using some of the money sitting in the business, without having to pay dividend tax at higher levels and with repaying the DL back at the official rate. Hence not just reducing my personal tax liability of drawing the money out but also adding to the flexibility of making repayments.

You do however raise a good point about using a DL for a deposit. But presumably if I was to have my mortgage application approved prior to drawing the loan, then by that point the loan will not feature on my application to the lender. Granted it will be more of an issue come re-mortgaging. An alternative could be to draw some money as salary whilst taking out a smaller loan and arranging to repay it within my mortgage term, for instance.

The interest only element is to safeguard against unemployment in the future whilst having the ability to make overpayments when in contract.

[jmo21]

A DL might help build up your deposit, but it will also count against you when the mortgage company does their calculation, just like credit card debt (and available credit on the cards!) And even available overdraft facilities.

[northernladuk]

I find it hard to believe they will lend you money without the deposit being available or having to tell them where it is. When you tell them a loan the application will probably falter. Speak a contractor.broker though.

[Jemz0r]

Noted.

Can I also check how is a DL repaid back to the company? Do I physically have to make transactions from my personal account to the company or can I simply declare a higher dividend during my self assessment (And presumably then also pay back the additional taxes to HMRC)?

[northernladuk]

Noted.

Can I also check how is a DL repaid back to the company? Do I physically have to make transactions from my personal account to the company or can I simply declare a higher dividend during my self assessment (And presumably then also pay back the additional taxes to HMRC)?

Just declare a dividend but don't pay yourself it. It wouldn't be just on your SA though. You'd still raise the correct dividend declaration paperwork. You do this as normal right?

DL's can get messy when you don;t know what you are doing. I'd speak to your accountant about all this so you can get a full picture including all the options rather than stabbing at questions on here IMO.

[Jemz0r]

Yes I do this as normal as part of the accounts submission.

I will always confirm any advice with my accountant before I proceed, but it is useful to raise the question here to see what others have done and how they've gone about doing it.

As I think more and more about this, I am now swaying to the idea that the DL may not actually serve me a great deal of purpose. It will give me a loan that I can use. Assuming this is accepted with the lender, this loan will still have to be paid back. From a tax point of view and assuming I will remain as a higher rate tax payer, it will be paid back with me carrying the same tax liability as if I am drawing it as income. The only difference I can see is that it will give me some flexibility to spreading costs. But if I were to do either and still walk away as a higher rate tax payer as a result, then I would still be liable to the 32.5% dividend tax. So flexibility aside at the expense of paying interest on the loan, is there any tax advantage really?

Am I missing something?

[FrontEnder]

I haven't been through the process but I wouldn't think a director loan would necessarily have a negative impact. If you've got a large warchest stockpiled in your company then that's very different to just getting a bank loan, or only loaning what you have available in your company.

I would guess that it would prompt the lender to have a closer look at you company finances. I think they may not need to do this at all if you're using your current contract/daily rate for the application.

It's all about risk and affordability. If your plan is to take out a DL and pay it back over a year or two an you have the disposable income from the amount you regularly pay yourself to do it, plus a large warchest, then it might be all ok. you're just doing it in a more tax efficient way than declaring a big dividend.

Best to speak to a specialist contract broker as well as your accountant.

[chopper]

I'm fairly sure you don't have to declare to a mortgage company a Director's Loan as a liability, because it doesn't show up on your credit file. When they ask for source of deposit, you are just drawing it down from your business. Ultimately, you will likely be 'repaying' the loan via dividends anyway, the only difference is which tax year that particular dividend is declared. The bank may ask for proof of deposit, i.e. business bank statements.

The affordability is based on your day rate, i.e. what you will be earning going forwards. Your Directors Loan is based on cash already earned.

Just be aware of the tax implications of Directors Loans - personal BIK if the loan is over £10,000; and a Corp Tax charge on any size of loan if it is unpaid more than 9 months after the year end, refundable when you do actually repay the loan.