This article is about limited company mortgages and purchasing property with a limited company.
This article does not contain information regarding a business owner or a director purchasing a property as an individual by using their personal income/profits. If you are a director wanting to purchase property as an individual, please read our article on director mortgages.
Buying a property via a limited company
Due to recent changes in UK tax laws, more and more landlords are creating limited companies for buy to let investment. Not only can this make landlords more tax-efficient, but can allow landlords to leverage further borrowing against their existing portfolios.
Limited company mortgages are usually available under the following circumstances:
- 85% loan to value mortgages (LTV)
- Rental income 125% of mortgage repayments
- Limited companies (with or without directors personal guarantee)
- SPV limited companies
- New limited companies
- With adverse credit issues (dependent on additional circumstances)
Limited company mortgages are not new, however they are being utilised more now than ever before. This is because landlords are trying to stay ahead of tax changes which are due to take place in 2020. Purchasing property via a limited company can offer some great tax benefits. For higher rate taxpayers, savings on tax can be significant. Limited company mortgages also allow landlords to reduce their financial risk, as personal liability and limited companies are separate entities.
Limited company mortgages are not considered to be a form of mainstream lending. Conventional mortgage brokers and high street lenders tend to focus on mainstream lending such as standard residential and buy to let mortgages.
As limited company borrowing is not well documented, landlords that approach high street lenders often can’t find the service or information they’re looking for. As a result, landlords may assume that getting a mortgage via a limited company isn’t possible and therefore continue to purchase buy to let property through traditional routes. Limited company mortgages don’t need to be difficult and can be quite easy, especially with a mortgage specialist by your side.
Mortgages for limited companies
The majority of lenders that offer limited company mortgages, only lend to companies that focus solely on property investment (SPV limited companies). There are a small number of lenders that may offer mortgages to limited companies that trade in other areas in addition to property. This would be classed as commercial finance. Read more about commercial finance here.
Mortgages for SPV limited companies
Limited companies that only hold property can be classed as a Special Purpose Vehicle (SPV). This is because the company’s only purpose is to hold property. Ensure the limited company is registered with Companies House as an SPV for property.
Lenders will also request a SIC code at the time of applying for a mortgage. A SIC code (Standard Industrial Classification of Economic Activities) is used to classify a business in terms of the trade-in which it operates. A SIC code can be applied to the company via Companies House.
Lenders for limited companies
SPV limited companies tend to have more options in terms of lenders and there’s certainly been an increase in the number of lenders entering this market. This is mainly due to the increased demand from landlords creating limited companies for property investment. Some lenders may require landlords to access mortgages via specialist mortgage brokers.
SPV limited company mortgage rates
Limited company mortgages can start from 85% LTV, but are often offered at 75% LTV. Mortgage rates will vary and can be offered on both fixed and variable rates.
Some lenders may have specific rates for limited companies and LLP businesses. Such mortgage products are usually geared for investment, such as buy to let mortgages.
Mortgages for non-SPV limited companies
There are only a small number of lenders that may consider mortgages for non-SPV limited companies. Companies may be trading in property in addition to other types of investment or trading. Even if a limited company didn’t trade in property at all, but required a mortgage to buy an investment property, it is still possible. LTV is slightly lower simply because of the additional risk a lender is taking. Typically, mortgages to non-SPV limited companies start at 75% loan to value.
Mortgages for new limited companies
Mortgages for new limited companies are possible but can be difficult. If the limited company is new, then registering it as an SPV can make it a lot easier to get a mortgage.
Mortgage products often start at 85% LTV. Affordability is generally assessed on the potential rental income that the property may generate. Potential rental income typically needs to be 125% of the mortgage repayment to be deemed a viable proposition.
Lenders will also conduct a credit check on the director of the company. If there are multiple directors, then lenders will credit check at least two directors. Directors with adverse credit may struggle, however there are specialist lenders that may consider lending. Lenders will also request evidence of income, either from the limited company, other ventures or from employment.
There are a handful of lenders that offer buy to let mortgages with no minimum income requirements and only require accounts for one year! You’ll more than likely need a specialist broker in order to obtain mortgages from such lenders. Our specialists have access to every lender, so if you find yourself in this position, do make an enquiry.
Mortgages for new non-SPV limited companies
Mortgages for new limited companies that aren’t SPV are deemed very high risk. This is because the company has no history, so the lender doesn’t have much on paper to convince them that lending would be safe. New limited companies also won’t have any credit, which poses another risk element for a lender. As the limited company is not classed as an SPV, the purpose of the company also isn’t clear.
The good news is that there are solutions for newly formed limited companies. Lenders may consider lending on the basis that directors can offer personal guarantees. A personal guarantee from a director acts as a safety net. If the mortgage isn’t repaid, then the director becomes liable to pay the unpaid balance of the loan. This is one way to minimise the risk for a lender, but in turn, directors are placing more risk on themselves.
In addition to director guarantees, lenders may also request further security. Further security can be offered via a director, in the form of a larger deposit or access to their assets, such as properties which have equity for instance.
Advantages of having a limited company mortgage
As with any mortgage, there’s always pros and cons, so let’s take a look.
The main advantage of having a limited company mortgage is that it may make your property ventures more tax efficient. If you pay tax on a high tax band, then a mortgage via a limited company will more than likely be advantageous. Corporation tax will drop to 17% by 2020 and could be more beneficial in comparison to paying income tax on a property without tax relief.
When limited companies are created, personal assets of any directors are completely separate from any ventures carried out by the company. This limits the liability of any directors of that company. If the company was dissolved, directors would still have their personal assets intact. Personal assets may only be chased if directors have offered personal guarantees.
If you require a personal mortgage via a traditional route, then lenders may not take finance you’ve already borrowed through the limited company into consideration. This can then increase your maximum loan amount for personal mortgages. Personal deposits can also be withdrawn from limited companies by directors with little or no tax liability.
Disadvantages of limited company mortgages
A limited company mortgage isn’t the right vehicle for every landlord. Without understanding your personal circumstances, it’s very difficult for an advisor to state whether or not a limited company mortgage would be the correct avenue to take.
The market is bursting with lenders offering buy to let mortgages. As the market is extremely competitive, buy to let mortgages can be very attractive in terms of fees and rates. As limited company mortgages are considered to be more niche, they do tend to have higher fees and rates. Another reason for the increase in rates and fees is because lenders always assess mortgage applications in relation to risk. It’s far riskier lending to a limited company than it is to an individual.
Limited companies will require additional administrative duties, especially if you’re creating a new limited company. For instance, limited companies all have legal obligations such as filing annual accounts. You’ll more than likely need an accountant, so do consider the additional time and costs associated with limited company mortgages.
In comparison to traditional buy to let mortgages, limited company mortgages are a lot more complex. The assessments that lenders carry out are usually in greater depth and can take longer to get a mortgage offer. This isn’t always the case, but certainly in our experience, have noticed the difference at times.
Do consult a specialist limited company mortgage broker who has experience in this field. Our specialists have experience in mortgages for limited companies and have access to the whole market, including specialist limited company lenders. Also be sure to consult an accountant who has experience with property tax and the new changes, as a buy to let limited company may not suit everyone.