Guide to Buy to Let Mortgages For Limited Companies in the UK
When investing in buy-to-let property, many different options are available for financing the purchase. One option is to take out a buy-to-let mortgage specifically designed for landlords who intend to rent out their property. Another option is to set up a limited company and apply for a buy-to-let mortgage under the company’s name. In this article, we will explore the concept of buy-to-let mortgages for limited companies and the advantages and disadvantages of this option.
What is a buy-to-let mortgage for a limited company?
A buy-to-let mortgage for a limited company is a type of mortgage designed for limited companies that want to buy a property for the purpose of renting it out to tenants. This type of mortgage has become increasingly popular in recent years due to changes in the tax laws for landlords.
Limited companies can be used to purchase and manage buy-to-let properties and are often seen as a tax-efficient way to do so. This is because a limited company is a separate legal entity from its directors and shareholders, and is therefore subject to a different tax regime.
A buy-to-let mortgage for a limited company works in much the same way as a standard buy-to-let mortgage. The lender will lend a percentage of the property’s value, and the borrower will be required to make regular mortgage payments, usually every month.
The key difference with a buy-to-let mortgage for a limited company is that the mortgage is taken out in the name of the limited company rather than in the name of an individual director or shareholder. This means that the limited company is responsible for making the mortgage payments and is entitled to any rental income generated by the property.
To qualify for a buy-to-let mortgage for a limited company, the limited company will usually need to meet specific eligibility criteria. This may include having an inevitable turnover or profitability level and a good credit rating.
A buy-to-let mortgage for a limited company can be a good option for landlords who want to take advantage of the tax benefits of using a limited company or protect their personal assets from the risks associated with property investment.
Advantages of a buy-to-let mortgage for a limited company-
A buy-to-let mortgage for a limited company offers several advantages compared to a mortgage as an individual landlord. Here are some of the benefits:
- Tax Efficiency: One of the main advantages of a buy-to-let mortgage for a limited company is the tax efficiency it offers. A limited company can claim tax relief on mortgage interest payments, significantly reducing the tax bill.
- Asset Protection: A buy-to-let mortgage for a limited company provides greater protection of assets. The company is a separate legal entity, which means that if the company runs into financial difficulties, the personal assets of the company’s directors and shareholders are protected.
- Increased Borrowing: Limited companies can often borrow more money than individual landlords. This is because lenders view limited companies as more stable and reliable than individual landlords.
- Professional Image: Operating as a limited company can give a more professional image to tenants and potential investors. This can help attract high-quality tenants and investors.
- Easier Transfer of Ownership: If a limited company owns the property, it can be easily transferred to another owner or sold to a third party without the need to transfer the property to a new individual owner.
Overall, a buy-to-let mortgage for a limited company can offer significant advantages over an individual landlord. However, it is important to consider the potential disadvantages and seek professional advice before deciding.
Disadvantages of a buy-to-let mortgage for a limited company-
While there are benefits to obtaining a buy-to-let mortgage for a limited company, there are also some potential disadvantages to consider. Here are some of the critical drawbacks:
- Limited choice of lenders: Not all lenders offer buy-to-let mortgages for limited companies, so your options may be limited. This can make finding the right mortgage with favorable terms more challenging.
- Higher interest rates: Buy-to-let mortgages for limited companies may have higher rates than personal buy-to-let mortgages. This is because lenders perceive limited companies as a higher risk.
- Increased costs: Setting up and running a limited company can be costly, with legal and accounting fees to consider. Additionally, limited companies may be subject to additional taxes, such as corporation tax.
- Stricter eligibility criteria: Lenders may have stricter criteria for buy-to-let mortgages for limited companies. They may require a higher deposit or rental income than personal buy-to-let mortgages.
- Personal liability: While a limited company can protect your assets in the event of financial difficulty, directors may still be personally liable for any wrongdoing. This means that directors may be held liable for any outstanding debt if the company runs into financial trouble or cannot repay the mortgage.
Considering these potential drawbacks is important when deciding whether to obtain a buy-to-let mortgage for a limited company. While the tax benefits and liability protection may be appealing, the higher costs and stricter eligibility criteria may not be worth it for some individuals. It’s always a good idea to consult with a financial advisor or accountant to determine if this option suits your circumstances.
Who is eligible for a buy-to-let mortgage for a limited company?
A buy-to-let mortgage for a limited company is available to companies set up specifically for buying and letting out residential properties. In general, the eligibility criteria for a buy-to-let mortgage for a limited company will depend on the lender. Still, there are some general requirements that most lenders will look for:
- The limited company must be registered in the UK and have a permanent place of business.
- The company should have at least two directors, and they should not have any criminal convictions or be subject to bankruptcy proceedings.
- The directors of the company must be able to demonstrate that they have experience managing rental properties.
- The company should have a good credit history and be able to demonstrate that it has the financial resources to manage the mortgage repayments.
In addition, most lenders will require the limited company’s directors to provide personal guarantees, which means that they will be personally liable for any missed mortgage payments if the company cannot meet its obligations.
It is important to note that eligibility requirements may vary from lender to lender, and it is important to shop around to find a lender that can provide a buy-to-let mortgage that meets the specific needs of your limited company.
How to apply for a buy-to-let mortgage for a limited company -
Applying for a buy-to-let mortgage for a limited company is a complex process that involves several steps, and it is important to understand the requirements before starting the application process. Here are the key steps to apply for a buy-to-let mortgage for a limited company:
- Set up a limited company: Before applying for a buy-to-let mortgage, you must set up a limited company. This involves registering your company with Companies House and obtaining a unique company registration number (CRN).
- Determine your eligibility: Not all lenders offer buy-to-let mortgages for limited companies, and eligibility criteria vary between lenders. To be eligible for a buy-to-let mortgage for a limited company, you must typically meet specific requirements, such as having a minimum deposit and a good credit score.
- Choose a lender: Once you have determined your eligibility, research different lenders and compare their mortgage products to find the best one for your needs. Factors to consider when choosing a lender include interest rates, fees, and repayment terms.
- Provide documentation: To apply for a buy-to-let mortgage for a limited company, you must provide a range of documentation, including your company accounts, bank statements, and tax returns. You must also provide details of the property you wish to purchase, including its value and rental income potential.
- Complete the application: After you have provided all the necessary documentation, you can complete the mortgage application form. The lender will review your application and may request additional information or documentation.
- Receive a decision: Once the lender has reviewed your application, they will decide whether to approve your mortgage. If your application is successful, you will receive a mortgage offer outlining the loan terms, including the interest rate and repayment schedule.
- Complete the purchase: After you have received a mortgage offer, you can complete the purchase of your buy-to-let property. You must sign a mortgage deed and transfer the deposit and any fees to the lender.
Tips for getting approved for a buy-to-let mortgage for a limited company-
If you’re considering applying for a buy-to-let mortgage for a limited company, here are some tips that may increase your chances of getting approved:
- Have a solid business plan: Your lender will want to see a detailed business plan outlining how to generate rental income and repay the mortgage. This should include financial projections, market analysis, and details about the properties you plan to purchase.
- Maintain a good credit score: As with any mortgage, having a good credit score is crucial. Your lender will check your credit history to determine whether you are a responsible borrower. It is important to pay your bills on time, reduce your debt-to-income ratio, and avoid applying for new credit in the months leading up to your mortgage application.
- Have a deposit: Most lenders will require a deposit of at least 25% of the property’s value, but some may require more. Having a larger deposit will not only increase your chances of getting approved, but it may also result in a lower interest rate.
- Seek advice from a specialist broker: Getting a buy-to-let mortgage for a limited company can be a complex process, so it may be helpful to seek advice from a specialist broker who can guide you through the application process and help you find the best deal.
- Provide accurate financial information: When applying for a buy-to-let mortgage for a limited company, you will need to provide detailed financial information, such as your company accounts, tax returns, and bank statements. It is important to ensure that this information is accurate and up to date to avoid any delays or issues with your application.
Conclusion -
In conclusion, a buy-to-let mortgage for a limited company is an option for those who want to invest in rental properties. It has advantages, such as tax benefits and asset protection, but disadvantages, such as higher interest rates and legal requirements. To be eligible for this type of mortgage, the limited company must meet certain criteria, and the application process may differ from that of a personal buy-to-let mortgage. It is important to consider all the factors carefully and seek professional advice before deciding.
