BTL mortgages for limited companies - everything you need to know
Limited companies benefit from the lower rate of corporation tax as opposed to income tax charged on earnings generated from rental income and are thus favoured by investors.
If you are engaged in the buy to let market, or are thinking of entering it, then seeking advice from a buy to let adviser will be your first port of call. Our specialist advisers will be able to provide information on using a limited company or a Special Purpose Vehicle (SPV). The latter is a company set up for the sole purpose of buy to let by a private individual or existing company, covering the purchase or re-mortgage of residential properties for letting.
Expenses and fees
In the past, sourcing a buy to let mortgage may have proved difficult but now banks are increasingly keen to finance these operations.
The majority of lenders will expect your limited company to be set up as an SPV but some lenders will deal with currently trading companies. In looking for a buy to let mortgage, you will need to clarify your set-up with your buy to let mortgage advisor.
There is little doubt that lending to landlords who have formed limited companies to manage their investments has increased dramatically over the past few years. The peak was in the first months of 2016 before the Stamp Duty surcharge was introduced. The 3% addition to Stamp Duty Land Tax applies to purchases of additional residential properties and was part of the Government’s Five Point Plan, focusing on support for first-time buyers and aimed at creating low-cost home ownership. This has had a significant impact on the buy to let market, but lenders have responded accordingly.
Lower tax exposure
Where previously rates of close to 5% applied to these loans, they have been halved in some cases, depending on the size of the deposit offered by the purchaser. This reflects the stricter affordability criteria applied by the lender and so for most landlords, the interest gap is narrower, but with a significant lump sum deposit good deals can still be struck and our mortgage advisers will be able to discuss these with you.
The Bank of England’s stress rates will also impact the lender’s ability to provide an affordable deal. Indeed, many have adjusted their rental cover ratio, the amount of income the landlord must take from rental income over and above mortgage payments which fall due. Significantly these apply to limited company operations as well as to private landlords.
At the same time as the Bank’s actions, the Prudential Regulation Authority has also reviewed underwriting standards in relation to buy to let mortgages. Consequently, firms they regulate have been asked to take a prudent line in lending to avoid the potential of excessive losses. This has resulted in tighter checks on the affordability of buy to let applications.
The availability of a loan will depend upon your corporate structure. You may have an existing company or be about to set up a new vehicle for your investment.
If you have an existing company but do not currently invest in buy to let properties, getting a loan could be difficult unless you set up a specific subsidiary. Even so, there are some lenders who offer loans, mainly seen as corporate facilities. A larger deposit may be required as the number of lenders is limited. Setting up a new SPV will open up more options, many of which may be available at a lower borrowing rate and our advisors will be able to help you to understand the choices available.
Companies classified as SPVs, dealing solely in rental properties, have many more options available to them when it comes to financing property. Given the niche nature of the financing, you will be best advised to deal with a specialist broker such as The Mortgage Hut.
Setting up a new company
If you already own rental properties in a private capacity, you may wish to consider creating a limited company to hold your assets and take advantage of the tax differences and write off options. However, the operation will involve a re-sale and purchase with associated legal costs, capital gains tax and stamp duty. You will have to run the calculations past your accountants before making this kind of decision.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.