Buy To Let Limited Company Mortgages- Benefits for Small Business Owners

Post the or business at Companies House , there a multiple other things that need to be considered. Even though for each business the requirements may vary there are few things which are common to most businesses – setting-up a business bank account , dealing with HM Revenue and Customs (HMRC) etc. Below mentioned are some important steps that need to be kept in mind after company formation:

The concept of lending to individuals who have establish themselves as Limited Companies has become a very popular concept. In the year 2017 so far, there have been a total of 163,000 mortgages that were given to Limited Companies. This is a growing trend that has been observed with exponential rise of Company Mortgages has transformed the buy-to-let, with landlords making the most of this tax saving provision. The high demand has also seen interest rate drop drastically. The reasons for this rise in Limited Company Mortgages, which is different than that of contractor mortgages , primarily boils down to taxes .

Although, the rise of Limited Company Mortgage has risen exponentially over the years it has many investors confused on the finer points of what is available, the benefits and what should be avoided in their current financial circumstance. This article aims to clarify the main structural issues that tend to confuse first time or even experienced investors.

Limited Company Types

For the purpose of making a distinction in the types of Limited Company Mortgages, lenders classify Limited Company borrowers into two types:

1. A Trading Company

A Trading company is one that has a primary business activity which is not owning property. This could be a Training Company or IT firm that is set-up in a residential property with money that the Company has earned over the years. This type of company doesn’t hold the property as a primary source of income.

2. A Special Purpose Vehicle (SPV)

A Special Purpose Vehicle is one that exist only to hold property, and have no other business operating out of it. An SPV can buy property under its name and let that property out for monthly rent collection. This type of company doesn’t conduct any type of business activity, its sole purpose is to hold that property and ensure that rent is collected regularly. The SPV may hold one property or multiple properties under its name.

To see if you meet the minimum SPV criteria, lenders will generally want to see the following information:

SIC code: Standard Industrial Classification of Economic Activities is a code given to businesses to classify them by the type of business activity they fall under.

Specific Property: This is to prove that the business activity of the company is only for to let purposes and revenue is only generated from letting the property out.

Getting a Limited Company Mortgage

The distinction of Limited Company types explained earlier is an important one that lenders will make while deciding the borrower’s capacity to repay the mortgage. For a Trading Company, a lender will want to see various documents that substantiate the performance of the company. What were the earning for the past and present years? How strong is the balance sheet? What are the future prospects of the company, for the next few years. By understanding the activity and future projections of the business , lenders can be sure whether the company has the capacity to pay back the mortgage on time every time.

Special Purpose Vehicles don’t need to bother with these formalities, as lenders don’t need a form of guarantee to safeguard again risks. An SPV is primarily base on affordability of the rental yield, therefore the challenges facing lender is considerably lower, however, as SPVs have no financial inclinations and thereby has to prove its credit worthiness. Lenders will generally base the loan on an 85% Loan To Value ratio (LTV), with rental income exceeding 125% of the mortgage repayment value to be adequate.

Directors’ Credit Rating

For both Trading Companies and SPVs, the company director/s have to take a personal guarantee for the mortgage. In the case of an SPV, the creditworthiness of the director will be checked as the company itself has no financial inclination. This could also involve checking the directors’ personal finances and income to see whether he/she has another source of income to sustain future payments of the mortgage.

In both cases, the director/s is personally liable to make future repayment on the mortgage. If for any reason the company fails to repay the loan, the lenders can question the directors for money owed to them. This is especially true for an SPV, where the company doesn’t have an additional income besides the income from rent paid on the property; and the directors’ financials then become paramount.

Limited Company Mortgage for a New Company

As discussed earlier, the main challenge for a new company is its ability to repay for lender. The lender may look at lending money to a new company with considerably more risk, as the lender has no past history to go by. In this situation, the directors credit history will be checked; and if that is also not available, the lender may ask for additional security or a higher deposit.

Limited Company Mortgage for an Existing Company

For any existing company that has past experience with letting property, this process gets a whole lot easier. Nevertheless, in both considerations the director will have to play the part of the guarantor, in order to give complete security to the lender. In some instances, when the company has multiple properties under its names and mortgages running on all those properties, the lender may refuse to give the company the loan as it exceeds the maximum threshold of credit that the company can acquire.

Some Additional Information for Trading and SPV Companies

In additional to what has been discussed, there are additional criteria that companies need to look at before lending money:

• Both SPVs and Trading companies can borrow up to 85% LTV.
• It’s acceptable for SPV companies that are day 1 companies to apply.
• Under certain circumstances there is no minimum threshold of income required.
• The maximum age at an applicant should be 80 years’ old.
• Commonly needs to be a non-trading company.
• First time landlords are welcome, but need to keep their personal financial details at hand.

Advantages and Disadvantages of a Limited Company Mortgage

Disadvantages

• As it essentially requires a landlord to setup a Limited Company, this adds to an additional process that the landlord has to go through.
• The paperwork involved can sometimes be quite over burdening, this increase usually translates to higher legal costs.
• Considering that most landlords apply for mortgages directly, as opposed to applying through a company, the number of lenders to choose from is very limited. This scarcity of lenders often leads to higher interest rates and less investment value.

Advantages

• There are huge tax benefits of applying for a mortgage as a corporation as opposed to applying as an individual. This is especially true for higher income earners.
• In such case the borrower has personal liabilities, taking a Limited Company Mortgage can give him the option to apply for loans in the company’s name while having his own liabilities.
• The Limited Company can have multiple shareholders can help manage company finances in a more efficient manner. It is also easier for a company to apply for Mortgage when there are multiple directors who can substantiate the company’s income from their personal income.

Final Words

For the majority of landlords who are looking for a Limited Company to invest in, the process is generally simple. You need not have any history with trading during and length of time. The online application generally takes about a day and costs £20. Once you have your limited company set-up, you can then apply for a Limited Mortgage instantly. Remember that as a director, your personal financial will be scrutinised. The process is the same as if you were applying for a personal mortgage. In the event that the company falls under hard times, you will officially be on the dock and personally be liable for any debt.

As explained earlier, Limited Company Mortgages are on the rise with investors buying into this product with greater tax benefits. This and the fact that you pay no income tax for when you decide to reinvest money on another property purchase, enabling you to grow your financial portfolio quickly. If ever there was a time for you to invest in a Limited Company Mortgage it would be now. So why wait.

Also See: Complete guide on Directors Loans Accounts

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.