Ensuring your deposit source is acceptable to your chosen lender is a vital part of the mortgage application process, as getting it wrong can cause severe delays later down the line. Consultant Broker, Jeni Browne, explains which sources are widely accepted by limited company buy to let lenders.
Whilst this may sound like an innocuous subject, the source of deposit when borrowing through a limited company can be a stumbling block that only appears post-offer, i.e. pretty late in the day! Not what you need when you’re about to exchange contracts.
The most common deposits for limited company applicants are:
- Personal Savings. This is the simplest way of providing a deposit. You will need to show a build-up of savings in your account, usually by providing at least three months’ bank statements. If a large sum has been paid in, underwriters will likely want to know the source. Traditionally, you would move this money into the company by way of a director’s loan.
- Gifted deposits from close family members. These are acceptable to lenders but usually need to be from parents or immediate family members, and lenders will often request to see proof of funds in bank statements. We would usually see the family member gift the money to the client, who would then move this money into the company through a director’s loan.
- Shares. This isn’t something I see very often (nor do lenders), but in theory, they are acceptable. The lender will want to see the contract note for the shares and potentially the funds in the account once the shares are sold. Again, the proceeds from the sale of the shares would then become cash which you would then move into the company via a director’s loan.
- Remortgage proceeds. You can remortgage a property held in your personal name and raise capital in the process. You can then move the funds into your Limited Company, traditionally by way of a director’s loan.
- Remortgage proceeds via company held property. Like the above, you can also remortgage equitable property owned in a Limited Company and use the released funds as a deposit to further a purchase via the same company. All Limited Company buy to let lenders accept this form of deposit.
- Sale of property. Rather than just remortgaging an existing property, you may want to sell one and use the proceeds to form a deposit for a new purchase. Depending on the property’s value and the equity within it, you may be able to put deposits down for more than one property and expand your portfolio more quickly. Lenders will request either bank statements showing funds going into the Limited Company account or a completion statement from your solicitor.
- Inheritance. Accepted as a deposit source by many lenders as long as they receive a letter from the solicitor confirming details. By its very nature, inheritance and probate scenarios can be pretty time-consuming, so finding the right lender can be essential.
- Deposits from overseas. Perfectly acceptable as long as you’re transferring the money from a country signed up to the Financial Action Task Force (FATF), which is the global watchdog for money laundering.
- Intercompany loans. This is something we’re now seeing more frequently than a couple of years ago, as for some, it can be more tax efficient. There are three main ways of structuring it, but in essence, it’s moving money from an existing company to another (established or new). Whereas withdrawing cash from a current company into your personal name may trigger a tax payment, there are ways of moving it into another company won’t. You will find that each lender is different in terms of what it will/won’t accept, and you will need to take professional tax advice to decide the most appropriate option for your circumstances.
- Intercompany loan: simply a loan from one company to another.
- Subsidiary company: you set up a new company that is 100% owned by your existing company, meaning money can pass from the parent company to the subsidiary. Our clients with funds in a Trading Company often use this as buy to let mortgage rates tend to be more competitive and available for SPV Limited Companies than Trading Companies.
- Shareholder Company: your newly created SPV Limited Company purchases shares in your existing Trading Company in exchange for the issue of further shares in the SPV. The Trading Company can now lend money to the SPV to fund the purchase of investment property. In this scenario, your SPV owns your Trading Limited Company (the opposite of the above). The benefit is this keeps your SPV owned by people rather than by another company. While not all lenders will accept this structure either, it is sometimes favourable as it's slightly easier to underwrite.
While this is becoming a relatively common practice, a few limited company buy to let lenders still aren’t entirely comfortable underwriting for these types of investment structures. However, we certainly have access to many that do, so if this is an appropriate method for you, then I’m sure we can help you find a willing lender. You must seek professional tax advice before making any decisions about limited company structures.
If you’re looking to finance a buy to let property through an SPV Limited Company and your deposit source is NOT on the above list, don’t panic! In my experience, some of the more specialist lenders are often more sophisticated and will take a more flexible approach. I’d recommend running your circumstances past us to confirm the best route to proceed.
If you have any questions about deposit sources for limited company buy to let property purchases, please do not hesitate to contact our expert team on 0345 345 6788 or email firstname.lastname@example.org, and someone will be able to help.