What is a Limited Company Buy-to-Let mortgage?
A Limited Company Buy-to-Let is where you set up a limited company to apply for and manage Buy-to-Let mortgages. This has become increasingly popular due to changes in stamp duty and Buy-to-Let mortgage interest tax relief. These changes have made it more expensive to grow your portfolio.
As a limited company it’s possible for landlords to avoid losing out on tax relief. In reality, a Limited Company Buy-to-Let mortgage is almost identical to a regular Buy-to-Let mortgage. The crucial difference lies in how lenders appraise your suitability for your loan.
Many high street mortgage lenders are less willing to lend to limited companies, as they perceive them as ‘riskier’. This is because many people seeking this type of loan are self-employed landlords, so the chances of business failure are viewed as more significant. This can make sourcing a Limited Company Buy-to-Let mortgage a potentially trickier process.
Fortunately, the number of landlords registering as a limited company is rising. This means that so do the number of mortgage options available.
WHAT ARE THE CRITERIA FOR A LIMITED COMPANY BUY-TO-LET MORTGAGE?
The option to purchase a Buy-to-Let property using a Ltd Company is open to anyone, subject to the specific current criteria of a lender. As it’s a specialised area, the choices of lenders may be more restrictive than options available for a standard Buy-to-Let.
However, the criteria that these lenders apply are very similar across both types of Buy-to-Lets. The property and rental yield are assessed in the same way and the maximum loan available will range between 75% and 85%, depending on the actual or anticipated rent.
The Ltd Company must also be set up with a specific SIC (Standard Industrial Classification) code. This will stipulate that the company cannot perform any activities other than buying and renting property. Typically, the codes required will be:
- 68100: Buying and selling own real estate
- 68209: Other letting and operating of own or leased real estate
- 68320: Management of real estate on a fee or contract basis
Advantages and disadvantages
The main advantage to be gained is in relation to tax efficiency. Any money you draw out of the business will be taxed at the prevailing rate.
However, by leaving money in the business and using it to renovate, refurbish or expand your portfolio, you’ll pay the lower rate of corporation tax.
There are other implications to consider, for example with regard to capital gains tax when a property is sold. It’s important to speak to a chartered accountant or specialist tax advisor about your longer-term plans.
Whether you opt to run your business on a personal or limited company basis, it’s advantageous to make your decision at the outset. Restructuring your business later on can attract additional costs. This is because you’ll need to transfer the ownership of properties from personal to a company ownership.
Buy-to-Lets for limited companies may be slightly more complicated to set up. However, by undertaking a full review of your situation, we should be able to source and process an application for you.
Using a Ltd company to buy a property is not the most common practice, therefore not all lenders are happy to accept these applications. This means that interest rates may not be as attractive as those available for mortgages in a personal name.
Additional running costs will include:
- Preparation of accounts
- Company/corporation tax calculations for HMRC
- Filing at Companies House
- Annual auditing
Your accountant may also charge higher fees when preparing accounts for a Limited Company.
WHAT IS A SPECIAL PURPOSE VEHICLE (SPV) FOR BUY-TO-LET?
An SPV is created to be a tax-efficient way of landlords holding any number of Buy-to-Let properties. The term SPV is used in the mortgage industry for a limited company specially set up to buy and rent properties.
So, can I set up a new SPV to purchase a Buy-to-Let mortgage?
The short answer is yes – setting up an SPV for a Buy-to-Let is open for anyone. However, you need to be sure that this is the most suitable strategy based on your circumstances. You should talk to your accountant about SPVs and consider getting legal advice. This can help you determine if an SPV is the right choice.
Provided your SPV is created with an acceptable SIC code, the company should be suitable for lenders to consider an application.
During the mortgage application, the directors will be subject to credit scoring to show that the company is creditworthy. This is due to the company not having any trading or credit history of its own when created. The lender will also need proof of the director’s income to establish a level of underlying affordability.
CAN I USE A TRADING LIMITED COMPANY INSTEAD OF AN SPV?
Like any other limited company, with an SPV you can draw income and dividends from the company structure. The profits retained within the company could, for example, ultimately be reinvested into expanding your property portfolio.
If your limited company earns money from any other business, it’s considered a trading company. It’s important to be aware that most Buy-to-Let lenders will only lend to SPV limited companies. This is because the inclusion of other business channels and income streams arguably introduces an element of risk.
There are, however, some niche lenders who do offer Buy-to-Let mortgages to trading companies. To discuss your options as a trading company, why not reach out today.
CAN I GET A LIMITED COMPANY BUY-TO-LET MORTGAGE WITH BAD CREDIT?
The criteria to obtain a Buy-to-Let mortgage under a limited company while you have a bad credit record is no different to that for a personal application. This means it’s possible that you will be able to get the mortgage you need.
Providing supporting documentation may be required to show that despite any issues in the past, you are now on a secure financial footing. Mainstream lenders tend to shy away from working with anyone with blemishes on their credit record.
Therefore, you’re likely to need to approach a specialist lender who will take a broader view of your circumstances. They’ll apply their own individual criteria and consider your current finances, future projections, and more recent credit history.
While any bad credit on your record will have an impact, the nature of the adverse credit event and how long ago it occurred will be important. A few missed store card payments three years ago will carry far less weight than a mortgage default in the last 12 months.
To increase your chances of success you can provide a larger deposit, improve your current borrowing habits, and seek the help of a mortgage broker.
BUY-TO-LET MORTGAGE RATES FOR LIMITED COMPANIES
Limited Company Buy-to-Let mortgage rates vary from lender to lender. Although this area of the market is growing, the choice of lenders’ rates are fewer than for personal Buy-to-Let applications. The rate you’re offered will depend on a range of things, including:
- How much deposit you can provide
- Your credit history
- The term length of any fixed rate period
Rates are constantly changing as the market moves and more lenders become involved. Our expert advisors can review your situation and goals to find the best rate options for you.
