Since April 2017, mortgage interest tax relief has reduced by 25% every tax year.
With the new changes in tax for the buy-to-let arena, investors have been looking for ways to alleviate the pressure and recoup some of the losses that they’d make under the legislation.
One such way is to put your buy-to-let mortgage through as a Ltd company.
Because Ltd companies are taxed differently; it’s thought that it’ll be more tax advantageous for them to switch to this sort of business structure.
However, if you’re looking to do this, you may have found that an inexperienced broker has turned you away.
Simply put, it’s because most high-street lenders won’t offer this sort of arrangement and stick to the standard black and white mortgages rather than getting involved with the more complex products.
And if you aren’t aware of the wider lender market, the chances are that you’ll end up borrowing money personally rather than as a Ltd company, meaning you miss out on a number of benefits.
Regardless of the size of your portfolio, there are massive tax benefits to buying your property through a Ltd company, especially if you’re on the higher tax bracket.
It can also be beneficial if you’re looking to buy property as a collective rather than two separate individuals, or if you’re wanting to distance yourself from personal liabilities if something were to go wrong.
Usually, specialist mortgage lenders are only likely to approve companies that deal solely in property, though there are a handful of lenders that will consider those trading in other areas.
Becoming a Special Purpose Vehicle…
If you’re registered as a Ltd company and only trade in rental property, then you’ll be known as a Special Purpose Vehicle (SPV) and will be classified by lenders according to the Standard Industry Classification (SIC) code that is given to your company by Companies House.
Examples of these SIC codes include:
68100 – Buying & sell own real estate
68201 – Renting & operating of housing association real estate
68209 – Other letting & operating of own or leased real estate
68320 – Management of real estate on a fee or contract basis
The lenders…
Despite there being a number of main lenders that specialise in Ltd buy-to-lets, with high street lenders becoming tighter and stricter with their lending, a specialist broker will be who you need to see to access this sort of mortgage. Loan-to-values begin at 85% and vary in rates and types so the number of products, whilst limited, is still huge in depth.
What if you’re already and Ltd company but aren’t an SPV?
There is still a small number of lenders who will look at buy-to-let lending to Ltd companies that trade in other areas. You will usually need a 25% deposit as a minimum, as the number of lenders is greatly restricted and they will require greater security to counteract the risk.
What if you’ve only just registered as an Ltd company?
If you’re a newly-created Ltd company, buy-to-let mortgages are still possible with a handful of lenders.
The Ltd company would need to be created when you apply and would benefit from being registered as an SPV to give you access to a wider panel of lenders and a greater chance of being approved.
As the mortgage is for a new company, there will be no trading history or track record of success that the lender can base their decision to lend on.
You will need at least two, or one if it’s a sole Ltd, directors that will have to be credit-checked to ensure that the Ltd company is creditworthy, as it won’t have a history of its own.
Because of this, lenders may ask for personal guarantees from the director(s), meaning that, if the mortgage isn’t paid, the director(s) become responsible.
The director(s)’ will also need to verify their income to establish that there is an underlying affordability.
Again, loan-to-values begin at 85% and the lenders will base your affordability on the rental yield, with your income needing to be at least 125% of your total mortgage payment.
What’s the catch?
Other than those that we’ve already discussed, there aren’t really any more.
There are a limited number of lenders, which means the criteria and product choice is restricted and leads to higher rates and it’s slightly more complicated to set up when compared to a standard buy-to-let.
But it can be hugely tax advantageous, and with limited liability, you won’t be forced to sell your personal assets if things don’t go to plan – unless you’ve given it as a guarantee.
How do I start?
As you can see, this sort of mortgage can be a complicated process and requires a wider knowledge of the mortgage market.
It’s imperative that you speak to a whole-of-market mortgage adviser that has access to a wider panel of lenders to ensure that you have the best chance of getting your mortgage approved.