Our guide to limited company buy to let mortgages
Investment in buy to let property is not the preserve of individual entrepreneurs. Indeed, reports in the Financial Times – amongst others – have revealed that around seven out of every ten new mortgages granted for the purchase of a home last year were made to limited liability companies.
That compared with only half the number of new mortgages granted to companies the year before.
Our guide to limited liability company buy to let mortgages may help to explain why that may be and what you need to know if you require a limited company buy to let mortgage.
Our guide to limited company buy to let mortgages
Landlords: why incorporate?
Conventionally, there are a number of advantages in setting up a limited liability company rather than running your business as a private individual:
- the company is a separate legal identity – you may be the beneficial owner, but the company has its own, entirely separate identity;
- when trading on your own account, you bear unlimited liability – with any company you own, however, your liability is limited by the value of any shares you have in it;
- your company is able to raise additional finance when necessary through the issue of shares – these may be offered to existing shareholders or new ones, but only a public limited company may offer shares to members of the public; and
- you may gain greater status and credibility operating your business as a company rather than as a sole trader – especially when it comes to raising a mortgage advance.
Why incorporate your buy to let business?
The advantages of incorporation apply equally to your buy to let business, and the necessary property investments you may make with the aid of limited company buy to let mortgages.
Recent changes in the regulation of the buy to let market have also lent additional advantages to incorporation.
The confidence of many investors in buy to let property has been hit by the government’s resolve to remove the tax relief previously granted on mortgage interest repayments, a steadily tightening regime of control and regulation by local authorities, and rising administrative costs for landlords.
In future, therefore, many unincorporated buy to let landlords face the prospect of paying income tax at the full rate on the whole of the profits from their business.
As a limited liability company, however, the buy to let investor qualifies for 100% tax relief on mortgage interest repayments and pays corporation tax on the profits made by the company. The rate of corporation tax is currently a relatively modest 19%, but is planned to be reduced to just 17% with effect from the 1st of April 2020.
Incorporation may not be the solution for every landlord, however, since the advantages also need to be weighed carefully against the costs involved in setting up a company, the likelihood of your need for more professional services – such as solicitors and accountants – and a longer-term view on the company’s liability for capital gains tax if and when a property is sold.
SPV limited company mortgages
Some limited companies are set up with the sole, specific purpose of owning buy to let property and nothing else. These are commonly known as Special Purpose Vehicle (SPV) limited companies.
Many lenders may prefer to arrange specialist SPV limited company mortgages, rather than mortgages granted to limited companies which are also involved in other trading activities, because the former have clearer, easier to understand objectives and purposes.
Getting a mortgage
The principles informing applications for limited company buy to let mortgages are essentially the same as those that apply to personal borrowing by landlords.
In the words of the Council of Mortgage Lenders (CML) a buy to let mortgage is quite distinct from a residential mortgage and is considered to be a business transaction. As such, a buy to let mortgage is not subject to the same rules and regulations which the Financial Conduct Authority (FCA) imposes on residential mortgages taken up by owner occupiers.
Because buy to let mortgages, including those applications by limited companies, represent business propositions, any lender pays particular attention to the business case – the forecast profits and financial success of the proposed venture – before deciding whether to grant a mortgage.
Although limited company buy to let mortgages are not subject to regulation by the FCA, the Bank of England’s Prudential Regulation (PRU) has nevertheless issued mortgage lenders guidance on the affordability tests which must be conducted before making any such loans. In accordance with proposals first published in September of 2016, for example, the PRU insists that projected rental incomes on property subject to a buy to let mortgage – including those granted to limited liability companies – must be at least 145% of the cost of monthly mortgage repayments.
These affordability tests came into effect in September of 2017.
A further test likely to be applied by any lender is the “loan to value” (LTV) – the ratio of the size of the loan to the value of the property. The greater the amount of your deposit, of course, the lower the LTV necessary for its purchase.
The current market for limited company buy to let mortgages Market conditions
A host of factors affect the market for limited company buy to let mortgages – and their relative availability.
On the 9th of March 2018, for example, the Daily Mail newspaper identified what it called a “surge” in demand for buy to let remortgages, driven by an exceptionally high number of landlords nearing the end of their current two-year mortgage deals and therefore seeking replacement funding.
The newspaper speculated that the reason for such numbers stemmed from the scramble that had been seen prior to the April 2016 introduction of Stamp Duty surcharges on second properties.
Changes in the base rate of lending also have a direct impact on the availability of buy to let mortgages and the interest rates at which they are offered. The recent decision by the Bank of England to increase the base rate from 0.5% to 0.75% (only the second increase in the past 10 years), and reported by the BBC on the 2nd of August 2018, had a more or less immediate affect on mortgage lending rates. The Independent newspaper on the 3rd of August, for example, cited those lenders which had raised mortgage interest rates just a day after the Bank of England’s announcement.
Shopping around for your limited company buy to let mortgage
Just as any other applicant, if you are a limited company in search of a mortgage, it pays to shop around for the most competitive rates and deals on offer – and here at Needing Advice, of course, we are able to do all the hard work, research and comparisons on your behalf, to find the mortgage that suits your particular needs and requirements, at what we believe is a competitive rate.