Fixed charges. Floating charges. Debentures. Personal guarantees. Steve Olejnik, COO, explains what type of security lenders may require when the borrowing is made by landlords using a limited company.
Not the most exciting of topics, so I'll keep this simple. When applying for a buy to let mortgage via a limited company a lender will ask for security in one of the following ways.
1. First charge & personal guarantee
In this case the lender will treat a limited company application in a very similar way to that of an individual application. The lender will take a first charge over the property and will require an unsecured personal guarantee from all directors.
Currently, more than a dozen lenders will accept this type of security from SPV limited companies; however only one lender – Keystone Property Finance will accept this security from trading limited companies.
2. First charge, personal guarantee and floating charge
In addition to a first charge and personal guarantee, some lenders will also take a floating charge over the assets of the limited company. A floating charge is an equitable charge over (usually) all the assets of the company both present and future. The company can deal with its own assets in the normal course of business without consent from the lender and the charge only becomes fixed over the current assets (or “crystallised”) if the company fails to repay the loan or, for example, goes into liquidation.
In the majority of cases and certainly when lending to trading companies, those lenders taking a floating charge will do so in the form of a debenture. The debenture is the document that lays down the conditions of the borrowing and will include the floating charge document. The debenture will also usually give the lender the power to appoint an administrator if required.
Why are debentures important?
Those looking to borrow in a Ltd Company capacity should ensure that the security they are giving to a lender does not restrict them from borrowing elsewhere at a later date.
The Ltd Company buys a property with a mortgage from a lender which takes a floating charge over the company as part of its security. Later, the Ltd Company wants to purchase a second property and applies to a new lender for a mortgage.
At best, the new lender will write to the lender which holds the floating charge to request confirmation that they are not planning on crystallising the charge. This confirmation is known as a "letter of non-crystallisation".
At worst, the new lender may decline the mortgage application because its policy forbids lending where another lender already holds a floating charge over the company's assets.
For landlords operating via limited companies, knowing which lenders to approach can be crucial. This is just one reason why many of these landlords engage specialist buy to let brokers to fulfil their borrowing requirements.
If you are a landlord looking for buy to let finance using limited company, call our experts on 0345 345 6788 to talk through the options.
If you are broker and you need help placing a complex buy to let case (including Ltd Company applications), please call our Deal Placement Team on 0345 148 9238. We have direct access to the specialist BTL lenders. We can work with you to get deals across the line. And remember, your client remains your client!
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