LIMITED COMPANY MORTGAGES
Why are some landlords incorporating their buy to let business?
A limited company buy to let business may offer financial benefits to some landlords and higher rate taxpayers who have a portfolio of properties may find it more tax-efficient.
It is important to note, however, that even with tax savings, a limited company landlord may end up worse off financially.
Can I save money by forming a limited company for my buy to let business?
Even if you are paying income tax at the basic rate of 20%, your liability reduces once the properties are transferred to the limited company. If you are paying income tax at the higher or additional rate, the savings might be substantial.
However, it is also important to consider the costs involved – both in setting up and managing the company such as legal fees, accountancy fees or Corporation Tax. These are implications of the transfer of the properties you own into a separate legal entity.
Quite possibly the most significant implication on the transfer to new ownership is the chance of needing a re-mortgage on your buy to let property from a standard mortgage to a specialist limited company buy to let mortgage.
It might be a good idea to offset the cost of raising any additional cash to finance the re-mortgage against any potential tax savings.
How big a deposit do I need for a limited company buy to let mortgage?
The size of deposit is determined by the lender’s assessment of the loan to value – the size of the mortgage advance in relation to the value of the property you are buying.
That assessment takes into account a host of factors which are aimed at determining the affordability of the mortgage loan with respect to the financial standing of your company.
Factors that will be checked are:
- A credit check on your company’s past management of previous credit and borrowing
- The length of time you have been trading as an SPV
- The audited accounts of your company.
If your company scores highly on all levels, a mortgage lender may be prepared to offer a loan to value mortgage as high as 85% meaning you would need to put down a deposit as little as 15% of the purchase price.
If some findings are less favourable – your limited company is not an SPV, for example – the number of lenders interested in granting a mortgage is smaller, and you may be offered an LTV of only 75% or less.
If I am already trading as a limited company, can I get a mortgage?
Lenders may limit the mortgages they grant to companies that have been set up to own and let property specifically.
That type of limited liability company is called a special purpose vehicle (SPV) – a company set up with the specific intention of owning and managing properties to let.
While the number of mortgage lenders prepared to consider applications from SPV companies can be small, the companies are still out there.
Does the limited company buy to let mortgage lender consider the rental income the company is likely to earn?
Yes, one of the biggest factors determining the affordability of a mortgage loan is the rental income your company is likely to earn from the buy to let property in question.
You will need to demonstrate a realistic rental income of at least 125% of the monthly repayments of any mortgage. In some cases, those earnings may need to be 150% or even 180% of the monthly repayment instalments.
Does it take longer to process a limited company application?
It is worth allowing extra time. Applications made by individuals and newly established SPV limited companies take a similar time to process, as the background checks are only carried out on the director(s) of the SPV.
SPVs with existing properties and limited companies already trading will take longer to process because checks have to be carried out on the company as well as the individual.
Why can I borrow more via a limited company than personally?
In 2017 the Prudential Regulation Authority (PRA) introduced new guidelines requiring lenders to tighten affordability checks on buy to let landlords borrowing personally.
Limited companies do not pay Income Tax so the new guidelines do not apply which means that lenders are able to give more generous income cover ratios.
What is the difference between an SPV and a trading limited company?
A Special Purpose Vehicle limited company is a corporate structure set up for the purpose of holding property only. A Limited Company is used to run a business.
How can I set up a SPV Limited Company?
You can either ask your accountant to set one up or you can do it yourself online at Companies House.
Can I borrow through a newly created SPV with no accounts?
Yes. The mortgage will be underwritten based on the individuals’ (directors and/or shareholders) circumstances.
All lenders will require that directors and shareholders provide personal guarantees which means that they are responsible for the mortgage in the event that the company is unable to settle mortgage liabilities.
Can I transfer my personally owned rental property to a limited company?
No. By law, the transaction must be treated as a sale by you to your company and will be classed as a related transaction.
Most buy to let lenders who offer products to limited companies, will consider related transactions.
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