Getting a mortgage can be stressful, especially if you’re wondering what income will be accepted by a mortgage lender as that can have a significant impact on the amount you’re able to borrow.
Yes, most mortgage lenders accept dividends as income. However, you’ll have to be able to demonstrate you’ve earned it consistently over the past one to two years as well as a number of key factors such as whether you’re a limited company director.
In this post, I’ll run through how you can increase your chances of using dividends as income for a mortgage, whether being a limited company director will affect your application as well as other types of income accepted within an application.
Getting A Mortgage With Dividend Income
There are mainly two ways you can earn dividends, you can buy stocks and shares from the various stock markets around the world, or you can be a company director where you have more control over the company itself.
Owning stocks that pay dividends. This is where you may have a stock portfolio, some of which will pay dividends at various points throughout the year. This can be monthly, quarterly or even yearly. You can use various methods to help demonstrate this income from bank statements to annual tax returns.
Being a limited company director. This method of earning dividends is where you have a senior role in a company, possibly even owning the entire entity. Company directors can have a complex payment structure that can involve a mixture of different payments including salary, dividends and bonuses.
Both of these sources of dividend income are accepted when applying for a mortgage, however, if you’re a limited company director the mortgage lender may require additional information.
This additional information for being a company director is to prove to a mortgage lender that you can afford the monthly payments and will continue to do so in the future. This may involve taking the performance of the company into account, such as looking at the profits to determine if the level of dividends they’re currently paying you is affordable.
Calculating Dividend Income For Mortgage
When calculating your dividend income, mortgage lenders look at how much you earn on an annual basis. Some lenders look at a rolling 12 month period from your current application date focusing mainly on bank statements and others focus on tax years using your tax documents.
Mortgage lenders typically want to see a minimum of six months of earnings, ideally two or more years of consistent earnings. It’s all about being able to demonstrate that your dividend income is consistent and are likely to continue into the future. This means if you’ve just had a one-off dividend payment and aren’t expecting another one for a long period of time, your mortgage lender may not include this in your application.
The total of your dividend income is then added together with other sources of income such as your salary and then a multiple of earnings is typically used to calculate an overall amount they’ll allow you to borrow.
This multiple of earnings is typically between 3.5 to 4.5 times your annual income including dividends, however, this will fluctuate from lender to lender depending on the lender’s risk tolerance and current lending criteria.
Mortgage Companies That Accept Dividends
Most mortgage lenders accept dividends although some will only take a percentage of this income into account as it can have a higher risk of not being paid, such as if the business performance drops. I’ve included a list of some of the largest mortgage lenders that accept dividends below.
- Natwest (RBS / Royal Bank of Scotland)
When looking for a mortgage just make sure you make the lender or mortgage advisor aware upfront that you have earnings from dividends that you’re wanting to put towards your overall income total to be used in the mortgage application.
This can help avoid wasting time exploring lenders that will not accept dividend income or even focusing on lenders that are known to accept dividend income. However, it’s also worth considering whether you need to use your dividend income at all which I’ll explain below.
Do You Need To Use Dividends in Your Mortgage Application?
It’s also worth thinking about whether you need to use your dividend income within your mortgage application. Depending on the amount of money you need to borrow, you might not even need to include your dividend income or you might even be able to borrow more by excluding it.
For example, say you were earning a £50,000 salary with £10,000 in dividends. One mortgage lender may accept all of your dividends, although to reduce their risk only offer you 3.5 times your income as your total borrowing, meaning a total of £210,000.
If another lender does not allow dividends but is willing to offer you 4.5 times your income as all your income is coming from a salary, the total amount you could borrow could be £225,000. This means the lender that excludes dividends from your income would actually lend you more money.
Of course, this heavily depends on the mix of how much salary you’re earning compared to dividends. Your earnings could be the other way round if you own the company and are wanting to make the best use of the tax advantages that being paid through dividends can provide. However, this is worth being aware of if you’re trying to get your dividend income included in your mortgage application.
I’ve also written a post where I look at how many times your income you can borrow for a mortgage that may be useful.
Can You Use Dividends For A Mortgage Deposit?
Yes, you can use dividends for a mortgage deposit as proof that you earned the money. Mortgage lenders are wanting to ensure that your deposit has been saved from income that you have earned, of which dividends qualify.
Mortgage lenders have to do a number of checks, including those for their internal risk calculations as well as fraud and money laundering checks.
By demonstrating that you have earned the money with proof of dividends it helps demonstrate to the lender that you saved the money yourself, so are good with money. This helps to show that you are a lower risk borrower, also that the deposit money hasn’t come from an unknown source. This can raise red flags around money laundering.
Does Being A Director Affect Mortgage Application?
Yes being a director of a limited company most likely will affect your mortgage application, mainly in the documentation that is needed to be able to validate your proof of earnings.
Lenders will look for proof that dividends are earned consistently and can be related upon in a similar way to a stable salary. If your income comes from a small business, lenders may also want you to submit a letter from your accountant to validate company accounts and payment history.
As a company director, you may also earn money in a number of different ways including a salary, dividends and bonuses. Below I’ve highlighted how this other income will be viewed by the mortgage lenders and how much will be able to be used in a mortgage application.
What Income Can Be Included For A Mortgage?
There are multiple sources of income that can be accepted when applying for a mortgage, however, each of them will be assessed differently. Some of the income, such as salary and dividends will usually be taken at 100%, although others such as bonuses, only a small fraction will be taken as they aren’t guaranteed and there’s a risk they might not be paid.
|Income Accepted For a Mortgage Application||Percentage %|
|Employment Basic Salary||Usually 100%|
|Self-employed profit (salary & dividends)||Usually 100%|
|Overtime/Bonus/Commission/Shift Allowance||0% to 100%|
|Bursary / Grant||0% to 100%|
|State Benefits (eg tax credits & child benefits)||0% to 100%|
|Stipend income||0% to 100%|
|Overseas Income||0% to 100%|
|Pension Income||Usually 100%|
The best way to help increase the percentage of your income that will be taken into account for your mortgage is to help demonstrate consistency over a long time frame, ideally two years or longer.
Summary – Do Mortgage Lenders Accept Dividends As Income?
Overall, yes mortgage lenders accept dividends as income however depending on the source of the dividend may require you to provide additional documentation.
If you have any questions or need any help to secure a mortgage with dividend income, definitely speak to a mortgage advisor that can give you advice related to your current circumstances. Some also specialise in getting mortgages for people with high dividend income.
This post I’ve written on what questions to ask a mortgage advisor may also be helpful if you’re looking to go down this route.
Good luck with your mortgage application!
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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