When you are applying for a mortgage you will need to prove to the mortgage lender that you will be able to manage the monthly repayments. This means that you will have to show that you have sufficient income to do so. If you are in employment and in receipt of a regular salary this is relatively easy to achieve.
If, however, your income is based on the receipt of company dividends, obtaining a mortgage may be more difficult. As experienced mortgage advisors in and around Worcester we can give you the most up to date and relevant advice to your particular circumstances. In this article we provide a brief definition of dividend income, explain why certain people need to source their mortgage repayments through this type of income and, finally, provide an overview of how to apply for a mortgage based on company dividends.
What are Dividends?
A dividend is an amount of money paid by a company to its shareholders out of its earnings. The company dividend will normally be either in the form of additional shares or cash. The amount of dividend paid will be commensurate with the number of shares that are held in the company. Clearly, for the purposes of funding a mortgage, the dividend would need to be payable in cash rather than in the form of re-investment in the company.
Why Source a Mortgage Through Dividends?
There are two basic reasons for a borrower wishing to base their mortgage application on dividend income. The first of these is where the borrower’s only income is investment income, of which dividends form a significant part. In this scenario, the borrower will have an investment portfolio the intention of which is to provide a regular income and the dividend income will be considered by the mortgage lender when deciding whether to grant mortgage facilities. The second type of situation is where the borrower is the owner of the business and elects to take all or part of his or her salary by way of a dividend payment. The principal reason for doing this is that dividend payments can be more tax efficient than salary payments.
Applying for a Mortgage
There are some mortgage lenders who will not grant mortgage facilities based on dividend income as a matter of policy. However, there are many that do. The key to obtaining a mortgage based on this type of income is establishing that the income that you will receive will have some certainty about it. This means that you will probably need to show that you can control the payment of the dividends and the amount that is paid. This is likely to be more challenging where the dividend is paid as part of an investment in the shares of an unconnected company than where the borrower is the owner of a company and taking dividends as part of his or her regular income. Most mortgage lenders who are prepared to grant mortgage facilities based on dividend income will require proof of the dividend payments and, if they are sourced from a company, are also likely to ask for proof that the borrower has sufficient control in the company to ensure that the dividends continue to be paid.
Anyone wishing to take out a mortgage based on their dividend income should seek the advice of a specialist mortgage adviser, who will be able to help them through the entire process.