This year, an estimated two-thirds of landlords plan to acquire a new property for their buy to let portfolios by using a limited liability company, according to a report in Landlord Today.
The article cites surveys suggesting that 65% of landlords with portfolios of 11 or more buy to let properties intend to make their next purchase via a company and even 62% of those owning ten or fewer such properties also plan to buy through a limited liability company.
The surge in company formations is likely a response to the final withdrawal of income tax relief on buy to let mortgage interest repayments. Switching to company-run buy to let businesses allows landlords to pay only a basic rate of corporation tax – currently set at 19%.
Finding a limited company buy to let mortgage
There is more involved in finding a limited company buy to let mortgage than simply switching ownership from yourself to the company you have set up. And that is why your first step might be to consult an independent broker familiar with this type of mortgage.
You may be advised, for example, that the transfer of ownership of those buy to let properties you already own also means remortgaging them – changing any buy to let mortgage you arranged as the private owner to a specialist limited company buy to let mortgage.
The advice of an experienced broker is also necessary because you have a much smaller pool of potential lenders when trying to find a limited company buy to let mortgage. By no means do all mortgage lenders offer such loans – and those that do are likely to lend only to particular types of company.
Your limited liability company may need to be a special purpose vehicle (SPV) – a company set up for the specific purpose of dealing in let property. The number of mortgage lenders prepared to advance a loan to an existing trading company that is not an SPV is even smaller. Because that pool is so small, you may find that you need to raise a deposit of at least 25% of the purchase price at the very minimum.
If yours is an SPV, however – and with all other aspects of your application being equal – you may find lenders prepared to offer a loan to value (LTV) mortgage of as much as 85% (requiring a deposit of just 15%).
As with any type of buy to let mortgage, lenders also consider the estimated return on your buy to let property. In the case of limited company buy to let mortgages, lenders will be looking for a rental income that is at least 125% of your monthly mortgage repayments. In some cases, the income may need to be 150% or even as much as 180%.
If you have just set up your SPV company, it will have no credit history – a further consideration which any lender is obliged to consider. Therefore, credit checks will be made on the director or directors of the company. Although a poor credit rating on the part of the directors is no absolute barrier, a personal guarantee on the part of the director may be necessary.