Can a first-time landlord buy a property in a limited company structure?
The short answer is yes. As you would expect there are a few things to bear in mind as Andy McOwat explains...
If you are thinking of becoming a residential landlord and need a buy to let mortgage to get started, there are some general lending criteria which apply regardless of whether it makes sense for you to borrow personally of via a limited company.
Home-ownership
Most lenders prefer first-time landlords to own their own home; however, there are some niche options for first-time landlords who are also first-time buyers.
Property value and loan amount
The minimum purchase price of the property is generally £75,000 although a few will lend on properties valued at as little as £50,000. Expect to be able to achieve up to 75% loan to value but remember that the greater your deposit, the better the rate you will be offered. Also, bear in mind the smallest loan amount that most providers will allow is £25,001.
Gifted deposits
Some lenders will also accept deposits which have been given as a gift from close family, i.e. parents and siblings. If you have a gifted deposit, the giver will be expected to sign a declaration that the deposit is a gift and that it is not refundable and the family member will take no charge over the new property.
Property types
Most lenders prefer first time landlords to cut their teeth on “vanilla” property. Think standard 1-2 bed flats let to couples and 2-4 bed houses let to families. There are very few lenders which will consider first time landlords who want to purchase an HMO or multi-unit without any experience of letting property.
Limited company borrowing for first-time landlords
As you are no doubt aware, it’s very important to take professional advice from an accountant to determine whether operating your portfolio in a limited company is the best route for you.
Here are some things to consider as a first-time landlord which only to apply to limited company applicants.
You can borrow more!
Lenders’ affordability calculations are less onerous than those applied to personal borrowers which means that you will be able to borrow more against a property.
On limited company applications, lenders will generally apply a rent to interest formula of 125% at 5.5% on products that have an initial period less than five years. This means they will expect the Interest Cover Ratio to be 125% of the monthly mortgage payment which will then be stressed at a rate of 5.5%. For five-year products, it is possible to achieve a stress test less than 5.5%.
Compare this to personal borrowers where lenders are more likely to apply an ICR of 145% stressed at 5.5% on rates with an initial period less than five years.
Four directors
There can be up to four directors on one buy to let mortgage application, although some lenders will only allow two. Company shareholders are not generally involved in the application process, so some landlords make their children shareholders because it can often make sense from an inheritance planning point of voice.
Obviously, take advice on this!!
SPV or trading limited company?
Most lenders that accept first time landlords will only lend to a Special Purpose Vehicle limited company. SPVs are companies that have been set up with one purpose, to hold and let property. When lending to first time landlords lenders tend not to accept trading limited companies. These are companies that have been set up to operate businesses other than property.
However, lenders will usually accept inter-company loans so you would be able to provide the deposit funds to your new SPV for the purchase of property.
These are just general pointers and I hope they are useful but if you want me to expand upon any of the points raised, please get in touch. My direct line is 01625 416396 or email me on andym@mortgagesforbusiness.co.uk
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22nd March 2017
