Limited Company Buy to Let Mortgages
A guide to limited company buy to let mortgages
It is firstly important to point out that whilst a limited company is supposed to limit the liability of the shareholders and directors, borrowing a buy to let mortgage under these terms will require you to sign away those protections under the personal director guarantee you will be required to sign as part of the mortgage application and legal process.
Lenders who operate within this market, which whilst is growing, is still a niche in the buy to let sphere, require the individual directors and shareholders to be underwritten as if the application was in their own names. It will be the credit scores and profile of the individuals which is checked. It will be the earned income of the individuals which needs to meet the criteria set out by the lender and it will be the individuals who will be fully responsible for repaying the mortgage.
The limited company will need to have the correct SIC codes, and we therefore suggest advice is taken when forming the company. The company will need to be a special purpose vehicle [SPV] and not a trading company. There are some lender options for trading companies, but they are few and far between.
There is no trading time required. You can set the company up today, and as long as it can be searched on company’s house and be seen as active you can apply for a limited company buy to let mortgage.
The sic codes required are one or all of the following:
68100 Buying and selling of own real estate
68209 Other letting and operating of own or leased real estate
68320 Management of real estate on a fee or contract basis
Typically, lenders will allow a maximum of 4 directors or shareholders on any company.
Company bank account
All direct debits for mortgage payments must be paid from a bank account in the company name. Unlike personal bank accounts which can easily be set up online and very quickly, a company bank account can take some time. In fact, I have known it to take 6+ weeks just to get an appointment to see the advisor to open the account. It is because of the increased due diligence required on company bank accounts that the delays occur with these. Advice is therefore you open a bank account with the bank you personally bank with. This should speed up due diligence as some has already been done on you as an individual. Mortgages will not be offered without the correct bank account being set up, and the direct debit mandate signed and the lender in possession of a direct debit in place.
Personal guarantee and legal advice
All limited company buy to let mortgages will require a director and shareholder personal guarantee. To double lock this down the lender will ensure you fully understand what you are signing by insisting you receive independent legal advice and confirm that this has occurred to them in writing. This will come at an additional cost to you and will need to typically be done by a separate solicitor to that who is doing the conveyancing as they are acting for the company. Some lenders have a slightly more relaxed view on which solicitor is giving the independent advice and do not mind it being the same as that who is doing the conveyancing, which does make the process more streamlined and expedient.
Funding the deposit
When you purchase via a limited company you will need to fund the deposit via the limited company. Where the company is new and hasn’t got retained profits to use the lenders will ask for the deposit to be funded from one of a few ways. There are some which are not acceptable, and I will cover these too.
Typically, a lender would expect the funds to be coming from the savings of the directors, and being director loaned to the limited company. In essence this sits in the same way as if you bought in your own name.
Some lenders will allow a gifted deposit from a direct family member. Direct would be parents, grandparents, and siblings. Of course, it might also be a spouse as the funds may be in a spouse’s bank account and the spouse is not on the limited company ownership due to the tax advice you received.
Some lenders- but very few it must be added, will accept an intercompany loan. It is understood that this can have significant tax savings for individuals who own other limited companies which trade, and they derive income from. The reason being is that dividend tax does not need to be paid, and the money can move across from one company to another, meaning that the amount available is higher as no tax is due- although the loan is made after corporation tax is paid. It is important again to stress individual tax advice should be sort here.
A popular source of buy to let deposit has become pensions. This could be the 25% tax free lump sum or the whole pension fund, of which an element will be taxed. Significant advice should be sought before doing anything with your pension fund, and this is only to explain that these funds are acceptable, and not to indicate it is appropriate for you to do so.
What source are not acceptable?
Angel finance: This is getting a random, non-relation individual to loan the deposit to your company for a rate of interest return. This would constitute 100% lending in the eyes of the lender and as such is not acceptable. Please see the Angel Finance chapter for the best way to utilise this source of funds.
Unsecured finance: This would be in the form of an unsecured loan, or credit card drawdown facility. Many courses will teach you to take out multiple credit cards and draw down on 0% for an arrangement fee leave the money in your account for 3 months and then say it is savings and apply for a mortgage. Not only would this constitute mortgage fraud, potentially black listing you for buy to let lenders it is also just terrible advice. However, there is nothing stopping you utilising these funds to buy for cash, and remortgaging to pay the debt off once the property has been refurbished and increased in value.
It is important to state that the original source of the funds must be established, proven and documented to the lender for money laundering and terrorist financing regulations. I have seen too many people over the years trying to be clever with the source of deposit and trying to actually hide the always come unstuck with an application should they have found a broker willing to place the case whose compliance hasn’t required them to ask the right questions.
Your property may be repossessed if you do not keep up repayments on your mortgage