Remortgage Using Retained Profits

What Are Retained Profits and Why Do They Matter?

Retained profits, also known as retained earnings, are the portion of a company's net profit that is kept within the business rather than distributed to shareholders as dividends. For limited company directors, retained profits are a common and legitimate part of running a tax-efficient business.

Many directors choose to retain profits in their company for several reasons. They may want to build up a cash reserve for future investment, fund business growth, maintain a financial buffer for quieter periods, or simply because extracting all profits as dividends would result in a higher personal tax bill.

The challenge arises when these directors want to remortgage. If a lender only considers the salary and dividends that have actually been drawn from the company, the director's assessed income may be far lower than the company's actual earnings. This can significantly limit borrowing capacity and make it difficult to access the mortgage amount needed.

For example, a director whose company earns 200,000 pounds in net profit might take a salary of 12,570 pounds and dividends of 50,000 pounds, retaining 137,430 pounds in the business. A lender using the salary-plus-dividends method would assess this director's income at just 62,570 pounds. But a lender using the retained profit method could assess income at up to 200,000 pounds, dramatically increasing borrowing potential.

Understanding which lenders consider retained profits and how they factor them into their calculations is therefore crucial for company directors who want to maximise their remortgage options. The difference can genuinely be the difference between being able to remortgage and being unable to borrow enough.

How Lenders Use Retained Profits in Income Calculations

Not all lenders that consider retained profits do so in the same way. Understanding the different approaches can help you and your broker identify the best option for your specific circumstances.

Net profit before tax method. Some lenders will assess your income based on your proportionate share of the company's net profit before corporation tax, regardless of how much you have actually drawn. This is the most generous approach and can significantly boost your borrowing capacity. Your share is determined by your percentage shareholding in the company.

Salary plus net profit share. Other lenders calculate your income as your salary plus your share of the company's net profit. This is similar to the above method but may treat the salary element separately rather than simply looking at total company profit. The result is usually very similar.

Salary plus dividends plus retained profit. A few lenders take a blended approach, adding your salary, dividends declared and your share of retained profit together. In practice, this arrives at a similar figure to the net profit method but calculates it differently on paper.

Average versus latest year. For each of these methods, lenders may use an average of the last two or three years' figures, or they may use the latest year. If your company's profits have been growing, a lender that uses the latest year will typically give you a higher income figure than one using an average. Conversely, if profits have dipped recently, an average may be more favourable.

It is important to understand that even among lenders who accept retained profits, the specific criteria can vary. Some may require a minimum shareholding percentage, typically 25% or more, before they will use this method. Others may want to see that the company has been trading for at least two or three years.

The retained profit approach is most commonly available through specialist and intermediary-only lenders rather than the major high street banks. This is another reason why using a specialist broker who has access to these lenders is so important for company directors.

Which Lenders Accept Retained Profits?

The number of lenders willing to consider retained profits has grown significantly in recent years as the mortgage market has become more sophisticated in understanding how company directors structure their finances. However, this lending approach remains more common among specialist and intermediary-only lenders than the major high street names.

Without naming specific lenders, as their criteria change regularly, the types of lenders most likely to consider retained profits include:

• Specialist intermediary-only lenders - These lenders only accept applications through mortgage brokers and often have more flexible criteria for company directors, including retained profit assessments
• Building societies - Several building societies have developed specific products and criteria for company directors that take retained profits into account, often with a more personal and flexible approach to underwriting
• Private banks - For higher-value mortgages, private banks frequently consider the full financial picture including retained profits, company assets and future earning potential
• Challenger banks - Some newer banking entrants have positioned themselves as more flexible than traditional lenders and may include retained profits in their assessments

It is crucial to understand that lender criteria in this area change frequently. A lender that accepted retained profits six months ago may have changed their approach, and new lenders may have entered the market with more favourable terms. This is why working with a broker who stays current with the market is so valuable.

Your broker should be able to provide you with a clear comparison of the different lenders available, showing how each one would assess your income and what borrowing capacity each approach would give you. This allows you to make an informed decision about which lender to apply to.

Do not make the mistake of applying to a lender without first confirming their approach to retained profits. An application to the wrong lender wastes time, adds unnecessary credit searches to your file and can be disheartening if the offer comes back much lower than expected.

Preparing Your Application to Maximise Retained Profit Income

To give yourself the best chance of a successful remortgage application using retained profits, thorough preparation is essential. The way your accounts are presented and the documentation you provide can make a real difference to the outcome.

Work with your accountant. Before starting the mortgage process, speak to your accountant about your plans. They can ensure that your company accounts are presented in a way that clearly shows the retained profits and your share of them. Some accountants may not be familiar with how mortgage lenders use retained profits, so it can be helpful to have your broker and accountant communicate directly.

Ensure accounts are current. Lenders using retained profits will base their assessment on your filed company accounts. If your latest accounts are significantly out of date, the figures may not reflect your current earning capacity. Discuss the timing of your application with your accountant to ensure the most recent, and ideally most favourable, accounts are available.

Prepare management accounts. If your latest statutory accounts are not yet finalised but show a strong trading period, some lenders will accept management accounts prepared by your accountant as supplementary evidence. These can help demonstrate current performance while formal accounts are being prepared.

Demonstrate company health. Lenders want to see that the company is financially healthy and that the retained profits represent genuine, sustainable earnings rather than one-off windfalls. Consistent or growing profits over two to three years present a much stronger picture than volatile earnings with a single exceptional year.

Explain any anomalies. If your accounts contain unusual items such as one-off costs, exceptional income, changes in accounting periods or significant asset purchases, prepare a brief explanation. Lenders and underwriters appreciate transparency and a clear narrative helps them understand the true trading performance of your business.

Keep personal finances tidy. While retained profits relate to your company, lenders will still assess your personal financial situation. Ensure your personal credit report is clean, personal debts are manageable and your bank statements show responsible financial management.

Retained Profits vs Dividends: Impact on Borrowing

Understanding the financial trade-offs between retaining profits in your company and extracting them as dividends is important for both your tax planning and your mortgage options. The two considerations do not always pull in the same direction.

Tax implications of higher dividends. Increasing your dividend drawings to boost your assessed income with salary-plus-dividends lenders will increase your personal tax liability. Dividends above the annual dividend allowance are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The extra tax cost needs to be weighed against the benefit of higher assessed income.

Corporation tax on retained profits. Profits retained in the company are subject to corporation tax but avoid the additional layer of personal tax on dividends. For directors who do not need to extract all profits personally, retention can be more tax-efficient overall. However, this tax efficiency comes at the cost of lower assessed income with some mortgage lenders.

The best of both worlds. By choosing a lender that assesses income based on net company profit or retained earnings, you can maintain your tax-efficient salary and dividend structure while still having your full company earnings recognised for mortgage purposes. This gives you the best of both worlds: tax efficiency and maximum borrowing capacity.

Your accountant and mortgage broker should work together to find the optimal balance for your situation. The accountant can model the tax implications of different extraction strategies, while the broker can show how each strategy affects your mortgage options with different lenders.

It is worth running the numbers both ways. In some cases, the additional tax cost of increasing dividends to satisfy a particular lender may be justified if that lender offers a significantly better interest rate. In other cases, the tax saving from retaining profits far outweighs any mortgage benefit, making a retained-profit-friendly lender the obvious choice.

Remember that your remuneration strategy should be driven primarily by sound business and tax planning, not by mortgage considerations alone. The mortgage market offers enough variety that there is usually a lender to suit your existing structure rather than requiring you to change it.

Working With a Specialist Broker for Retained Profit Remortgages

The retained profit approach to mortgage lending is a specialist area that sits outside the standard knowledge of many high street mortgage advisers. Working with a broker who has deep expertise in company director mortgages is not just helpful, it is often essential for achieving the best outcome.

A specialist broker will bring several critical advantages to your retained profit remortgage:

Market knowledge. They will know which lenders currently accept retained profits, what their specific criteria are, and how they compare on rates and terms. This knowledge is constantly evolving as lenders change their policies, so it requires ongoing research and industry contacts to stay current.

Application presentation. How your application is presented to the lender can make a significant difference. A specialist broker knows what underwriters look for, how to structure the income narrative and what supporting documentation will strengthen your case.

Accountant collaboration. Experienced brokers are used to working alongside accountants and can communicate clearly about what the lender needs from the accounts. This three-way relationship between you, your accountant and your broker is important for a smooth application process.

Access to intermediary-only lenders. Many of the lenders that accept retained profits are intermediary-only, meaning they do not accept direct applications from the public. You can only access their products through a broker, making professional advice a necessity rather than a luxury.

Problem-solving. If your application hits a snag during underwriting, an experienced broker will know how to address the issue, whether that means providing additional documentation, offering an explanation of an unusual accounting item or finding an alternative lender whose criteria are a better fit.

When choosing a broker, ask them directly about their experience with retained profit cases. How many have they handled? What lenders do they typically use? What typical borrowing amounts have they achieved for directors with similar profiles to yours? A broker who is genuinely experienced in this area will be able to answer these questions confidently and give you realistic expectations for your application.

Make sure your broker is authorised and regulated by the Financial Conduct Authority (FCA) and that their fee structure is transparent. Some brokers charge a fixed fee, others work on a percentage of the mortgage amount, and some are paid by lender commission. Understand the costs before you commit.