Buy to let mortgages for limited companies

Investing in buy to let properties has been on the increase for a number of years and recent tax changes have encouraged many to look at the possibility of creating a limited company as an appropriate structure for the enterprise.

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.

The change in the market has meant that an increasing number of landlords are incorporating and moving their holdings to lower tax exposure. Consequently, loans to limited companies are on an upward curve. Not only has availability increased but rates have dropped, driven by the growth in high street banks’ interest in the buy to let mortgage sector.

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.

If you are setting up a new company for your purchase, lenders will normally look at an 85% Loan to Value calculation and check your potential rental yield. Company directors will also be subjected to a credit check as the company itself, as a new entity, will have no creditworthiness. This may mean that the lender will seek personal guarantees from the directors, rendering them responsible should the company fail.

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.