Posted 1 Jul 2019
If you are the owner of a limited company and need a mortgage because you want to buy a property within your company, it is most likely that you will be interested in applying for a buy-to-let mortgage. Many people choose to buy a property within a company because of the savings on tax. To qualify for a limited company buy-to-let mortgage, you’ll need to meet certain criteria which will depend on the type of limited company you have, as well as the number of directors and shareholders.
Why take out a mortgage through a limited company?
Many investors choose to secure a mortgage through a limited company because of the tax benefits. Because there are no limits on how long your company has been trading for, you can set up a company online at any time, and quickly apply for a mortgage as soon as or before it has been set up. As the director of the company, the lender will quickly assess your job, income and credit history the way they would with a standard residential mortgage that was in your name rather than a company. You will pay a more favourable rate of tax by purchasing a property through a limited company (known as a tax wrapper), but should be aware that as director, you will be responsible for monthly repayments should the company go bust or suffer major losses.
Trading and SPV companies
Both trading and SPV companies are limited companies. A trading company has one main primary form of trading alongside the owning of property. For example, you could have an IT company dealing with all-things IT, which also owns residential property. An SPV (Special Purpose Vehicle) company is a company that is purely set up for holding a house. For instance, you could set up a limited company in your name that doesn’t do anything or have any business activities, but holds a property with expenses going out and rent coming in. An SPV can hold more than one property in a portfolio.
Limited companies and mortgages
If a trading company has the desire to purchase a property with a mortgage, a lender will need to examine the company’s performance and success. You’ll need to provide evidence of accounts, outgoings, expenses and future projections, as well as current profit. A lender will need to be assured that the company is making money and that it will not go bust or be unable to keep up with mortgage payments.
If you have an SPV company, you do not need to provide any of this – all you will have is the property that you intend to purchase. However, from a lender’s point of view, there is the issue that the company doesn’t do anything or make any money.
In both instances, a lender will need a personal guarantee from a company director. This means that if the company is unable to meet repayments on the mortgage, a lender can claim arrears from the director themselves, and they will be required to pay the outstanding sum. Essentially, if the company holding the mortgage fails, the director will be personally responsible. This is especially the case with an SPV company, because the company doesn’t make any money to pay the mortgage in the first place.
Criteria for limited company mortgages
It is not true that a company needs to have been trading for a particular number of years to secure a mortgage deal. If you set up an SPV, you can apply for a mortgage the very next day (and even before the company officially exists at all).
Points to consider when taking out mortgages for limited companies
- The lender is likely to charge a greater arrangement fee to set up your mortgage, as they will need to look into both your credit history and accounts, and that of your company, meaning that more work is involved on their part.
- Your solicitor may charge greater fees as they will need to do extra work regarding the company’s articles of association. You’ll also need to have legal advice regarding the guarantee you’ll need to make as a director for the mortgage, and a solicitor who can witness you signing the agreement to ensure you understand what you are committing to.
- Many lenders are going down this route because of the tax benefits, but you should weigh up the higher fees involved in setting up your mortgage.
If you’re thinking of taking out a mortgage through a limited company, we can put you in touch with lenders who will consider your circumstances. Get in touch with our team of experts at iam mortgages today for free and impartial advice by calling us or submitting an online enquiry form.