Buy-to-Let Mortgages for Limited Companies by Eli Kosiner from Harford Financial
While most mortgages are homeowner mortgages or personally owned buy-to-let mortgages, another class of mortgage, is becoming more popular. This is the buy-to-let mortgage specifically for a limited company. Here’s what you need to know about limited company mortgages.
by Eli Kosiner, owner at Harford Financial.
Eli started his career in Financial Services in 2001 and founded Harford Financial Ltd in April 2017.
What Are the Advantages of a Limited Company Buy-to-Let Mortgage?
One of the reasons property investors are considering buying their property through a limited company, and limited company mortgages, are the tax advantages it might offer. Changes brought in under Section 24 of the Finance (No.2) Act 2015 have restricted the mortgage interest individuals can claim as a tax expense. As such, scenarios are occurring where it may be financially better to own a buy-to-let through a limited company rather than in individual names.
These restrictions do not apply to limited companies under the current tax laws.
However, there are other pros and cons of buying property via a limited company. So before considering investing in property through a limited company it is essential to take individual professional advice on whether it is right for you or not.
What Type of Company is this For?
Certain limited companies can apply for a Buy-To-Let mortgage. They are available to already-existing limited companies or a newly formed limited company. The company might be a trading company – one that also has some other business – or a company formed just to own one or more properties. This type of company is sometimes known as a special purpose vehicle or SPV.
It is important to note that different mortgage lenders have different rules on what type of limited company they will offer Buy-To-Let mortgages to. For example, some mortgage lenders will not give mortgages to trading companies. So, it is essential to take professional advice before forming a limited company or applying for a Buy-To-Let mortgage through a company.
Loan to Value (LTV)
Whilst most lenders offer up to 75% LTV or Loan to Value, there are some lenders who can increase the borrowing up to 80%.
A mortgage broker can advise you on what loan to value the different buy-to-let mortgages offer.
Interest Rates
As with personally owned Buy-To-Let mortgages, the interest rate will depend on the individual lender and type of mortgage. Primarily, there are fixed rates for limited company mortgages. These usually run for 2, 3 or 5 year periods. There are occasionally discounted or tracker rate mortgages also.
Typical interest rates for this type of mortgage are usually higher than personally owned Buy-To-Let mortgages. A mortgage broker can help you find the most cost-effective interest rate for your limited company Buy-To-Let mortgage.
Security
As well as using the investment property you are purchasing as security for the loan lenders will normally require a personal guarantee from the directors and/or shareholders of the limited company before they will offer a mortgage. This means that the directors and/or shareholders, as well as the company, will be liable for the mortgage repayments and mortgage balance.
Banks and Building Societies
Most of the high street banks and building societies do not offer Buy-To-Let mortgages for limited companies.
This type of mortgage is generally only available from specialist mortgage lenders. This also means that there is less choice, and less competition, in this mortgage market than the wider mortgage market.
Bear in mind that different lenders have different criteria for their lending. Many lenders have a limit on the total number of properties or a total value of properties in your limited company portfolio. Many lenders have a minimum property value they will lend on.
A specialist mortgage broker can tell you which banks and building societies offer limited company Buy-To-Let mortgages.
Costs/Fees
Limited companies taking a Buy-To-Let mortgage will normally pay higher costs and fees than with a personally owned Buy-To-Let mortgage. These extra costs should be taken into account when considering if property investment through a limited company is right for you.
- Limited company mortgages sometimes have a higher arrangement fee, booking fee or product fee. This may be a percentage of the mortgage advance.
- Limited company mortgages will normally cost more in legal and solicitor’s fees. This is because your solicitor or conveyancer will need to check the articles of association, directorships, shareholdings and other particulars of the company in addition to the other legal work involved with conveyancing.
- Your home may be repossessed if you do not keep up repayments on your mortgage.
- There are likely to be additional legal fees involved with setting up the personal guarantees directors/shareholders may have to give.
Limited company mortgages and stamp duty: Limited companies buying property will also need to pay stamp duty (or similar) at the appropriate rate. Our online calculators for Stamp Duty Land Tax (SDLT) in England and Northern Ireland [LINK], Land and Buildings Transaction Tax (LBTT) in Scotland [LINK] or Land Transaction Tax (LTT) in Wales [LINK] can help you calculate how much this will be.
How Do I Apply For a Buy-To-Let mortgage Through a Limited Company?
The application process for a limited company mortgage is similar to when applying for a personally owned Buy-To-Let mortgage.
Some limited company mortgage lenders do not accept direct applications from clients. In these cases, you will need to apply through a mortgage broker or intermediary.
Your mortgage lender will carry out due diligence checks to make sure that the mortgage is affordable. These will vary depending on the lender but might include some or all of:
- Checking the accounts, balance sheet and credit history of your company, if you are applying through a company that is already trading. (But note that your company does not need to be trading yet to apply for a limited company mortgage.)
- Checking the expected rental income the property will earn or the rental yield. The monthly rent may need to exceed the monthly mortgage repayments by a certain percentage. This typically ranges between 125% and 145%. This is known as the interest cover ratio or ICR.
- Carrying out due diligence on the occupations, incomes and credit histories of the company directors and/or shareholders. This may involve credit scoring the directors and/or shareholders.
- Some mortgage lenders may consider company directors and/or shareholders with adverse credit history.
- Your mortgage lender will also require a valuation of the buy-to-let property.
As with a personally owned buy-to-let mortgage, you can also request a mortgage offer agreement in principle on a limited company buy-to-let mortgage.
Lastly, remember that although Buy-To-Let mortgages for limited companies are becoming more common today they are still very much a specialist kind of property finance. It is always advisable to take professional advice and consult with a mortgage broker before considering this type of property finance.