Obtaining a buy-to-let mortgage through a limited company is becoming increasingly popular with landlords and investors. But which criteria affect the lender’s decision to grant a mortgage?
In recent years, tax reforms have made buy-to-let mortgages obtained through a limited company more tax-efficient than those acquired in your own name. For instance, in April 2017, a four-year process began which will ultimately see mortgage interest tax relief restricted to the basic rate of income tax. This led many landlords to incorporate their property businesses for future property purchases, taking advantage of 19 per cent corporation tax rates (18 per cent from April 2020).
Today, roughly a third of BTL mortgages can be used to acquire property through a limited company. From a lender’s perspective, a buy-to-let mortgage provided to a company presents comparable risks to one provided to a private landlord or investor. Indeed, these companies are referred to as ‘tax wrappers’; the people behind the company determine its success or failure, rather than the company itself.
These are the key criteria any mortgage lender might consider, before deciding whether to grant a mortgage to a limited company…
Is the company a special purpose vehicle (SPV)?
Properties must be acquired through a special purpose vehicle – a company which has been specifically set up to buy, sell or let residential properties. Few lenders will be willing to offer a mortgage to a company already in existence (a trading company), unless its only income and assets relate to BTL property. The SPV must be used to fund the deposit, though this can be gifted by one of the directors. The financial history of these directors will be considered to ensure they meet the standard lending criteria. Mortgage applications from partnerships and LLPs are rarely accepted, though some specialist lenders will consider them.
While personal mortgages often have a high maximum loan-to-value (LTV) threshold, those provided to a limited company generally require a deposit of at least 20 per cent. Indeed, to qualify for the generous rates presently being offered by certain lenders, you’ll need a 35 per cent deposit. Deposits can’t be loans from another company, and proof of funds will be required at an early stage in most application processes. Gifted deposits from individuals to directors in the SPV are acceptable, providing they originated in the UK.
Whether they’re lending to a business or an individual, mortgage companies want to ensure the property they’re lending on represents a sound investment. Inflated offers made in a competitive bidding process may be viewed dimly, as might an offer on a property known to have subsidence or be situated in a high risk flood area.
Type of mortgage requested
Like residential mortgages, buy-to-let mortgages acquired through a company may be fixed-rate, variable-rate or trackers. The overall repayment terms vary widely, and it’s possible to obtain an interest-only BTL mortgage rather than a repayment mortgage. Your choice of criteria will be considered by the mortgage lender’s underwriters, so don’t assume your brand-new limited company will automatically be approved for an interest-only mortgage due to be repaid within 15 years. Many lenders require evidence that rental income will be 145 per cent of monthly mortgage payments, though some lenders accept 125 per cent.
Interest stress test
Another factor to consider when applying for a corporate BTL mortgage is the stress test. This checks whether mortgage payments could comfortably be met if interest rates rose. Typically, the stress rate for a portfolio of up to ten mortgaged properties is three percentage points higher than the standard variable rate once an initial fixed-rate period ends. Bear in mind that these initial rates on buy-to-let mortgages obtained through a limited company are already higher (by as much as one per cent) than those available to a private individual.
There’s extra paperwork to submit for a BTL mortgage through a company, which has the unfortunate side-effect of increasing arrangement fees and legal costs. Lenders have to investigate the directors as well as researching the company’s articles of association and other documentation. Extra paperwork increases the likelihood of a key document not being available, getting lost in the mortgage lender’s filing system, or flagging up a potential issue.