Director's loans - for a house deposit?

[BolshieBastard]

Hi All

I am a relative newcomer to the world of contracting, having set up my limited company in April last year, so I am 3 months away from my first year end.

I have a question regarding the use of a directors loan account. Could I use this to help towards a house deposit?

Originally I was looking at house hunting in August/September this year, by which time I would have the necessary funds to put towards the deposit. However an ideal property has come onto the market and it is one I would dearly love to try and go for - the stumbling block is not having the funds in place to cover the deposit at this moment in time.

I was hoping to use the directors loan account to help with the deposit. I got in touch with the accountant who advised me that I can do this, but mentioned that an overdrawn directors loan account could spark a HMRC enquiry. What are other people's views on this?

If this is not a recommended route to go follow, does anyone else have any suggestions as to obtaining finance?
One option I thought of was to get a loan through my bank account, but a) what should my employment status be on the loan application and b) would this have a negative impact on my credit score ?

Any suggestions would be most welcome

Rick

Erm, LOL!

Do you even have an accountant!?

[DirtyCash]

Update on the topic

This seems to be the only post on the whole internetz, so I was just wondering if OP actually managed to get a mortgage with an outstanding director's loan? I'm in a similar situation where I am looking to borrow 9k from my LTD warchest. Did the OP declare the director's loan to the bank? Did the bank see financial records of money moving around and ask questions? Was the mortgage offered without question?

I've been asked to submit 3 months of company bank statements, though the movement of the loan was more than 3 months ago, so it does not show on those particular statements. I'm not sure if the bank are looking just to see if money is coming in i.e. my invoices are real and are being paid.... or trying to find any detail that might suggest it could be a bad decision to loan to me?

Any help appreciated!

Noobz

[SarahL2012]

This seems to be the only post on the whole internetz, so I was just wondering if OP actually managed to get a mortgage with an outstanding director's loan? I'm in a similar situation where I am looking to borrow 9k from my LTD warchest. Did the OP declare the director's loan to the bank? Did the bank see financial records of money moving around and ask questions? Was the mortgage offered without question?

I've been asked to submit 3 months of company bank statements, though the movement of the loan was more than 3 months ago, so it does not show on those particular statements. I'm not sure if the bank are looking just to see if money is coming in i.e. my invoices are real and are being paid.... or trying to find any detail that might suggest it could be a bad decision to loan to me?

Any help appreciated!

Noobz

I've just got a mortgage - and had to provide evidence to HSBC and the solicitors as to where the money for the deposit came from. Luckily the majority for me was from a previous house sale so there was a clear audit trail, but I have had to provide screen dumps & print outs of all the relevant bank accounts. The buyers of my old house were first time buyers and had a gift of about £10k from their parents. The exchange date was held up when the solicitors decided that they needed signed documents from the parents stating where that £10k had come from to cover the money laundering checks. Its all got a lot tighter since I last had a mortgage.

So you will be asked to self-declare where the money has come from. Presumably they've also taken copies of your company accounts that would show the loan?

[TheFaQQer]

I've just got a mortgage - and had to provide evidence to HSBC and the solicitors as to where the money for the deposit came from. Luckily the majority for me was from a previous house sale so there was a clear audit trail, but I have had to provide screen dumps & print outs of all the relevant bank accounts. The buyers of my old house were first time buyers and had a gift of about £10k from their parents. The exchange date was held up when the solicitors decided that they needed signed documents from the parents stating where that £10k had come from to cover the money laundering checks. Its all got a lot tighter since I last had a mortgage.

So you will be asked to self-declare where the money has come from. Presumably they've also taken copies of your company accounts that would show the loan?

I didn't have to do any of that last year when I got my mortgage. The solicitor asked where the money was coming from, and I just said it was from my bank account. Gave her a screenshot of the homepage showing the balances and that was fine.

It's going to get a lot harder from now on, though.

[TheCyclingProgrammer]

FWIW, I've just taken an extra large dividend (which is going to be taxed at the higher rate) to make up our final deposit on our first house, which we're currently searching for.

The idea of taking an additional directors loan up to the BIK limit (£10k now) that could be comfortably paid back with regular payments before the CT charge kicks in, in order to top up our deposit and push us into a better LTV band was discussed with my mortgage advisor.

His advice was that most lenders do not like any part of your deposit to come from a loan, unless its an unconditional gift. You might get lucky and they might not query it but if you're asked where the deposit has come from you will either have to choose to lie (and make a fraudulent application) or hope they don't mind. In short, he advised against it. At worst they'll not allow it, at best they'll probably take your monthly repayments into consideration when calculating affordability.

One way you could effectively make use of a directors loan, assuming your company has sufficient reserves and you're fully aware of all the rules regarding directors loans, is to take a loan up to the BIK threshold *after* you've bought the house and use it to pay a lump sum off the mortgage and arranging to repay the loan off on a monthly basis as long as its paid back within 9 months of your company's financial year end.

This could potentially save you some interest. As long as the loan is under £15k, you could repeat this, allowing 30 days between final repayment and taking a new loan to avoid bed and breakfasting rules (although evidence of the previous loan being paid off on a regular monthly basis might be a strong enough argument that the new loan isn't the same as the previous one anyway). Having said that, if you finish paying off the loan by month 9 of your financial year, it would be wiser to wait 3 months between loans anyway, so the next loan falls at the beginning of your next financial year, giving you the full 21 months to pay it off.

[titan]

One way you could effectively make use of a directors loan, assuming your company has sufficient reserves and you're fully aware of all the rules regarding directors loans, is to take a loan up to the BIK threshold *after* you've bought the house and use it to pay a lump sum off the mortgage and arranging to repay the loan off on a monthly basis as long as its paid back within 9 months of your company's financial year end.

I am not quite sure what the problem can be even if the director's loan exceeds the 10K limit (as long as it is not left outstanding for more than 9 months after the company’s accounting period end). All that the 10K limit matters for (as far as my accountant has told me and what my reading up has shown) is that for higher loans, a company board resolution is required. For a typical contractor setup where one owns 100% of the shares, this sort of board resolution is not going to pose a challenge, is it?

[TheCyclingProgrammer]

I am not quite sure what the problem can be even if the director's loan exceeds the 10K limit (as long as it is not left outstanding for more than 9 months after the company’s accounting period end). All that the 10K limit matters for (as far as my accountant has told me and what my reading up has shown) is that for higher loans, a company board resolution is required. For a typical contractor setup where one owns 100% of the shares, this sort of board resolution is not going to pose a challenge, is it?

There is a limit on loans that require a resolution - £10k or £15k I think, but £10k is the limit before you have to either pay interest on the loan at the HMRC prescribed rate or incur a BIK tax charge.

It may well be that you can take a higher loan and pay the HMRC going rate of interest and still come out on top, as the interest becomes company profit but it really depends on how much interest you pay on your mortgage and the personal tax cost of extracting the interest (after corporation tax) paid to YourCo.

What you need to do would be to calculate the true interest rate by accounting for corporation tax and your marginal rate of income tax. For arguments sake, if you are a higher rate payer, then for every £10 of interest you pay YourCo, it's a net profit of £8 after CT, and if you took that as a dividend, you'd pay £2 in dividend tax, leaving you with £6 cashback on your interest payment.

Stick with the £10k limit and save yourself the faff I say unless it's really going to save you significant money.